HICL Infrastructure (HICL) has lifted its medium-term annual return target to 10% and above with plans to add higher-returning “enhancer” investments to its portfolio.
Ahead of a meeting at the London Stock Exchange this afternoon to brief investors on its capital allocation framework, the £2.5bn core infrastructure fund said the new investments would build up to 20% of the portfolio alongside its existing growth and yield assets.
Its stock exchange announcement did not give examples of the new investments HICL would undertake, but Edward Hunt, head of core infrastructure funds at manager InfraRed, said it was a “natural progression” for an investment company that had steadily increased its growth investments to nearly half of the portfolio in the past 10 years.
“These investments are expected to complement the existing portfolio by introducing additional avenues for value creation, supporting HICL’s target of a 10%+ total return over the medium term while remaining aligned with the company’s risk parameters and overall core infrastructure focus,” it said.
HICL floated 20 years ago with a 7%-8% annual return target which it has exceeded with an 8.5% total underlying investment return. However, in common with other listed infrastructure funds, HICL shares have traded well below the value of its assets since late 2022 leaving with shareholders a total return including dividends of just 7.9%.
With a double-digit discount barring fund raising through share issuance, the company, like its peers, has had to become self sufficient, recycling capital for new investments, share buybacks and dividends through asset sales.
Today’s strategy update sets out how the 6%-yielder will generate £1.6bn over the next five years from operating cashflows and disposals, such as the £311m sale of its stake in the French A63 motorway in March.
“HICL’s progressive dividend policy will be maintained and is expected to remain covered, notwithstanding a modest reduction in near-term cash dividend cover as capital is redeployed into higher-returning opportunities,” it said.
HICL has been on the front foot trying to placate shareholders after an uproar late last year forced it to pull out of a merger with InfraRed’s other listed fund, The Renewables Infrastructure Group (TRIG). In annual results at the end of May it promised to hold bi-annual continuation votes if the shares continued to trade more than 10% below net asset value. It made a total return on net assets of 10.3% in the year to 31 March.
Our view
James Carthew, head of investment company research at QuotedData, said: “HICL’s new strategy seems designed to shift it a bit closer to the higher total return/higher risk end of the infrastructure spectrum, looking to compete more with the likes of 3i Infrastructure (3IN) and Pantheon Infrastructure (PINT), which have been generating much higher long-term total returns. There will be relief amongst HICL shareholders that the progressive dividend policy is being retained. At around 17% this morning, HICL’s discount is one of the widest in the sector, so some of the money recycled from the existing portfolio will be needed to help tackle that.”
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