TIDMHICL
RNS Number : 4258A
HICL Infrastructure PLC
24 May 2023
24 May 2023
HICL Infrastructure PLC
ANNUAL RESULTS FOR THE YEARED 31 MARCH 2023
This announcement contains Inside Information.
The Board of HICL Infrastructure PLC ("HICL", or the "Company")
announces Annual Results for the Company for the year ended 31
March 2023. The Annual Report and Accounts are available at the
following link: https://www.hicl.com/AnnualReport2023
Highlights
For the year ended 31 March 2023
-- Total Shareholder Return(1) was 6.3% (2022: 12.8%) delivering
long-term value for shareholders against an uncertain macroeconomic
environment.
-- 1.8p increase in NAV per share to 164.9p (31 March 2022:
163.1p), driven by the portfolio's high (0.8x) inflation
correlation, partially offset by a 0.6% increase in the weighted
average portfolio discount rate.
-- Portfolio return(2) of 10.2% (2022: 9.6%), demonstrating the
inherent defensive characteristics of the portfolio and the strong
inflation linkage.
-- 14% uplift in the Directors' valuation(3) of the portfolio to
GBP3,772.8m (31 March 2022: GBP3,311.0m). This increase was largely
driven by the GBP435m of net investment activity in the year.
-- This investment activity refined the portfolio and enhanced
the Company's ability to generate sustainable long-term earnings,
with:
o GBP545m invested across three assets with an additional
investment agreed post year-end in Altitude Infra. These modern
core infrastructure investments have added valuable diversification
and improved portfolio metrics.
o GBP108m of disposal proceeds received from QAH, and a further
partial disposal of Northwest Parkway agreed post year-end for USD
86m. Both disposals undertaken at a price in excess of carrying
value, realising outperformance and providing an alternative source
of funding for attractive investments.
-- The Company strengthened its balance sheet with an increase
in its Revolving Credit Facility (RCF) to GBP650m expiring on 30
June 2026 and an oversubscribed equity issue of GBP160m.
-- In May 2023 HICL completed a GBP150m Private Placement,
effectively converting existing short-term drawings to a longer
maturity, reducing interest rate risk and diversifying the
Company's sources of funding.
-- The dividend guidance of 8.25pps confirmed for the year to 31
March 2024(4) and extended to 31 March 2025(4) at the same level,
reflecting the strength of the underlying cash flows. The extended
guidance reflects the Board's priority to continue to invest in
building a healthy and sustainable long-term earnings base,
particularly as its PPP concessions mature and redeem capital.
-- HICL has published its Sustainability Report today, with
enhanced disclosure and demonstrating significant progress against
objectives. HICL's Sustainability Report can be found at:
https://www.ircp.com/SustainabilityReport2023
-- The outlook for core infrastructure investment remains
buoyant, powered by key growth drivers, including decarbonisation
and digitalisation. Equipped with a healthy balance sheet,
diversified sources of funding and InfraRed's global capability,
HICL is well placed pursue its strategy with discipline and
ambition.
1. Based on interim dividends paid plus change in NAV per share
in the year, divided by opening NAV per share
2. Performance of the portfolio relative to the opening weighted average discount rate
3. The Directors' Valuation comprises the valuation of the
investment portfolio under the Investment Basis and the investments
committed to by the Company at the reporting period end. The
Directors' Valuation is an Alternative Performance Measure
4. This is a target only and not a profit forecast. There can be
no assurance that this target will be met
Summary Financial Results
(on an Investment Basis)
for the year to 31 March 2023 31 March 2022
Income(1,2) GBP254.2m GBP405.8m
Profit before tax ("PBT")(3) GBP198.5m GBP368.4m
Earnings per share ("EPS") 9.9p 19.0p
Dividend per share 8.25p 8.25p
1. Includes net foreign exchange gain of GBP26.3m (2022: GBP5.5m)
2. Income was GBP202.3m on an IFRS Basis (2022: GBP371.8m)
3. PBT was GBP198.4m on an IFRS Basis (2022: GBP368.7m)
Net Asset Values 31 March 2023 31 March 2022
Net Asset Value ("NAV") per share 164.9p 163.1p
Q4 Dividend 2.07p 2.07p
NAV per share after deducting
Q4 dividend 162.8p 161.1p
Mike Bane, Chairman of the Board, said:
" I am pleased to present another resilient set of results for
the Company with NAV growth of 1.8p in the year contributing to a T
otal Return for shareholders of 6.3% . Against a volatile
macroeconomic backdrop, this performance demonstrates the
portfolio's strength and key defensive characteristics.
The Company has delivered on the investment pipeline identified
last year and continued its strategy of active asset rotation with
accretive disposals. New high-quality investments spanning modern
core infrastructure sectors add valuable attributes to the
portfolio and, importantly, support long-term cash and earnings as
HICL's PPP concessions mature and redeem capital. This reflects the
Board's commitment to position the Company to deliver a sustainable
dividend and compelling total return over the long term."
Edward Hunt, Head of Core Income Funds at InfraRed Capital
Partners, HICL's Investment Manager added:
"The delivery of NAV growth against a volatile backdrop
demonstrates the defensive characteristics of core infrastructure
alongside the benefits of expert portfolio construction and sound
capital management.
High quality acquisitions and accretive disposals in the year,
and post year-end, illustrate the role of active management and
asset rotation in optimising portfolio construction, enhancing
long-term earnings generation and providing alternative sources of
funding to the Company.
Infrastructure continues to benefit from powerful growth
drivers, including decarbonisation and digitisation, which stand to
benefit existing investments and underpins long-term demand for
infrastructure development. HICL is well placed to pursue its
strategy in a range of market conditions, supported by its
diversified portfolio and robust balance sheet."
Chair's Statement
I am pleased to present another resilient set of results for the
Company against a volatile macroeconomic backdrop.
HICL's expertly diversified portfolio of essential core
infrastructure assets has again demonstrated its defensive
characteristics, delivering a Total Shareholder Return(1) for the
year of 6.3% and a portfolio return(2) of 10.2%.
HICL continues to deliver long-term value for shareholders,
despite the current macroeconomic and financial conditions.
Inflation reached its highest level in over 30 years across HICL's
core geographies, resulting in increased interest rates and
significant financial market volatility. Cash flows from the
Company's diversified portfolio benefit from high inflation
correlation and robust capital structures with limited sensitivity
to higher financing costs. Proactive management of the Company's
debt facilities and accretive share issuance in the year ensured
that HICL maintained a solid balance sheet position throughout.
The Board and HICL's Investment Manager, InfraRed Capital
Partners ("InfraRed"), remain focused on the active management of
portfolio composition, with a clear strategy to markedly increase
asset life and future earnings generation within the portfolio,
such that HICL remains well positioned for the longterm as its PPP
concessions mature and redeem capital. Targeted acquisitions and
disposals in the year have contributed significantly to this
strategy; effectively recycling capital, improving diversification
and introducing highly attractive asset characteristics into the
portfolio.
Financial performance
Financial performance in the year to 31 March 2023 has been
resilient, with Net Asset Value ("NAV") growth of 1.8p per share to
164.9p. The return from the portfolio was 10.2% (March 2022: 9.6%),
outperforming the Company's expected return of 6.6% for the period
(the Company's weighted average discount rate as at 31 March
2022).
NAV growth in the year was primarily driven by the impact of
higher actual and forecast inflation on the Company's cash flows.
HICL's strong inflation correlation of 0.8x serves to protect
investors' capital in higher inflationary environments such as
those experienced over the past 12 months. Strong inflation
correlation is a deliberate part of portfolio composition and its
positive effect more than offset the associated impact of higher
long-term government bond yields in the year, which saw the
portfolio's weighted average discount rate increase from 6.6% to
7.2%.
A more detailed explanation of the portfolio's valuation and
discount rate movements over the past year is given in the
Valuation of the Portfolio section of HICL's 31 March 2023 Annual
Report.
Business model in action
HICL delivers value by investing in and actively managing
high-quality core infrastructure assets in attractive sectors and
geographies (for more information see HICL's core infrastructure
framework). Societal demand for new infrastructure remains strong,
due to ageing assets and demographic shifts, and is being driven by
the powerful megatrends of digitalisation and decarbonisation.
These transformative forces present significant opportunities for
HICL to invest in attractive sectors, where investments offer a
core infrastructure risk profile, stable income and the prospect of
long-term capital growth. Further discussion on the core
infrastructure market can be found in HICL's 31 March 2023 Annual
Report.
As HICL carefully navigates this evolving core infrastructure
landscape, the Board is confident in InfraRed's proven ability to
identify and capitalise on attractive opportunities that will
generate long-term value for our shareholders.
The attractive attributes of modern core infrastructure are
evident in the Company's acquisitions during the year, which span
the electricity transmission, communications and transport sectors.
Together, these investments have increased the weighted asset life
and inflation correlation of the portfolio, offer predictable
income under regulated and contracted frameworks, and have
significant growth potential through their strategic positioning
with exposure to the powerful growth drivers of the modern
economy.
Acquisitions in the year have significantly contributed to our
strategy to futureproof HICL's investment proposition, considering
the maturity profile of the Company's PPP concessions. Since HICL's
first non-PPP investments in early 2016, the Company has materially
increased its weighted average asset life to 32 years (Sept 2015:
21 years), increased the portfolio's inflation correlation to 0.8x
(Sept 2015: 0.6x), and substantially increased the long-term
forecast investment valuation to GBP2.4bn in 2050 (Sept 2015:
GBPnil in 2050).
Maintaining a strong balance sheet in the current volatile
market environment is crucial. During the year, the Company
demonstrated its ability to raise funding across both debt and
equity markets to fund its new acquisitions:
-- In July 2022 HICL activated a GBP330m accordion to its
existing GBP400m Revolving Credit Facility ("RCF");
-- in July 2022 GBP160m was raised via an oversubscribed and NAV
accretive share issue;
-- in March 2023 the RCF was renegotiated at a higher level
(GBP650m) and with a longer tenor (three years) to 30 June 2026,
maintaining the same margin; and
-- in May 2023 HICL completed a GBP150m Private Placement,
effectively converting existing short-term drawings to a longer
maturity, reducing interest rate risk and diversifying the
Company's sources of funding.
The use of selective disposals as a further source of funding
was demonstrated by the sale of Queen Alexandra Hospital (which
completed in May 2022) and the partial sale of Northwest Parkway
(which was announced after the year-end), both in excess of their
holding value. This accretive recycling of capital not only
provides an additional source of funding to pursue new investments
but improves key portfolio metrics, and supports the Directors'
Valuation.
Dividend guidance
The Board is pleased to reconfirm the dividend guidance of
8.25pps for the year to 31 March 2024(3) , and to extend that
guidance out for the year ending 31 March 2025(3) at the same level
of 8.25pps. In reaching this decision, the Board recognises the
positive impact of inflation on the Company's portfolio and its
cash flows; but also the need to protect the longer-term interests
of shareholders and futureproof HICL's investment proposition.
Since the Company's IPO, HICL's investment strategy has
underpinned a compelling total return proposition, of which the
dividend has constituted a significant element. HICL's shareholders
have long been 'ahead of the curve', enjoying the highest cash
dividend in the immediate core infrastructure peer group for the
best part of 20 years. This has been delivered notwithstanding the
specific challenges of recent years (e.g. the Carillion liquidation
and Covid-19) and the effects of proactively reshaping the
portfolio beyond PPP assets to capture longer-term cash flows with
greater growth, which tend to initially provide lower yields.
The portfolio's ability to capture inflation, principally in the
NAV, has been a defining benefit for investors over the year and
has provided significant protection against a higher interest rate
environment. Although there is a contractual lag before this
inflation increases distributable cash in a significant way, the
benefit compounds over time and has significantly enhanced the
portfolio's cash flow and earnings profile over the long term.
Additionally, those specific assets which have seen their
distributions temporarily constrained are expected to contribute to
cash flows increasingly in time, as are those newer investments
with lower initial yields which will serve to bolster dividend
cover. Increasing cash generation from the portfolio, coupled with
a more enduring platform for long-term earnings generation,
supports the Board's ambition to resume dividend growth in due
course.
Sustainability progress
HICL invests in essential infrastructure assets that over 20
million people worldwide use and depend on in their day-to-day
lives. The Board recognises that this confers a responsibility to
actively contribute to the 'social' component of the ESG framework,
and utilises this lens in the development of the Company's
sustainability strategy. I am pleased to also see the progress made
in this area by the Investment Manager, who through their Portfolio
Impact team surveyed 61 clients from HICL's portfolio to gain a
deeper insight into asset-specific challenges and satisfaction
levels. These responses will flow directly into both targeted and
scalable initiatives to deliver improved social outcomes. A more
detailed explanation of InfraRed's sustainability initiatives is
given in the Investment Manager's Report.
To consistently meet sustainability reporting expectations and
offer accountability to investors requires continuous improvement.
Last year InfraRed launched a data collection process to ascertain
the greenhouse gas emissions associated with HICL's entire
portfolio, selecting 2019 as the base year to avoid Covid-19
distortion. The Company has now published its first 'live' year of
portfolio emissions data, covering 100% of the portfolio and
providing investors with tangible data that we can look to improve
on going forward. To sit alongside this disclosure, HICL has also
published new net zero targets for the portfolio, plotting the path
to decarbonising the portfolio by 2050.
The Company's portfolio-wide annual ESG survey has been expanded
again this year, with 95 questions used to capture greater amounts
of data. This has enabled HICL to report as an Article 8 fund under
the EU's Sustainable Finance Disclosures Regulation ("SFDR").
Improved data collection and reporting is also a key component of
the Company's Task Force on Climate-related Financial Disclosures
("TCFD") disclosure, which HICL has now been undertaking in full
for the past three years.
An in-depth review of the Company's and Investment Manager's
sustainability performance and ambitions can be found in HICL's
standalone Sustainability Report, available on the Company's
website under Reports & Publications.
Board succession
In line with the UK Corporate Governance Code, after nine years
on the Board, Frank Nelson will step down in July 2023. Frank was
appointed to the Board in 2014 and has served as Senior Independent
Director for seven years. I would like to thank Frank for his
unwavering support and valued contribution to the Company.
Kenneth Reid will succeed Frank as Senior Independent Director
in July 2023, subject to re-election at the 2023 AGM.
The Board recognises the significance of having a diverse range
of views and experiences to support improved decision-making. The
Board composition complies with the recommendations made by the
Hampton-Alexander and Parker Reviews as well as the FCA's Listing
Rules, as applicable to closed-end investment companies. Further
information can be found in the Report of the Directors - Diversity
Policy.
Outlook
HICL continues to operate in an unpredictable macroeconomic and
geopolitical environment. Financial markets remain volatile, and
the level and timing of peak inflation and interest rates remains
uncertain. Against this short-term outlook, the Company's own
valuation assumes a significant decrease in inflation over the
coming year, with HICL's UK RPI forecast returning to 2.75% from
April 2024. In isolation, were outturn inflation to be higher than
assumed, this would have a positive impact on the Directors'
Valuation.
InfraRed continues to see strong demand and robust pricing for
high-quality core infrastructure assets, proven by HICL's recent
disposal, activity across other InfraRed-managed funds, and
observed market data points. These asset realisations also provide
an important alternative source of capital outside of equity and
debt markets and enable continued refinement of HICL's portfolio.
Notwithstanding this, the shift in macroeconomic conditions has
negatively impacted listed market valuations across real assets and
is likely to reduce the Company's access to equity capital markets
in the short term.
Looking further ahead, the outlook for the core infrastructure
asset class remains buoyant, underpinned by the growth drivers of
decarbonisation and digitalisation combined with the growing need
to enhance ageing infrastructure. Equipped with a healthy balance
sheet and multiple sources of funding, HICL is well placed to
continue navigating the evolving core infrastructure landscape with
discipline and ambition, delivering sustainable long-term income
and capital growth to its shareholders.
Mike Bane
Chair
23 May 2023
Chair's Statement footnotes
1. Based on interim dividends paid plus change in NAV per share
in the year
2. Performance of the portfolio relative to the opening weighted
average discount rate as at 31 March 2022
3. This is a target only and not a profit forecast. There can be
no assurance that this target will be met
Investment Manager's Report
In a year of heightened macroeconomic uncertainty, the Company
has performed as designed. HICL's strong correlation to inflation
more than offset the associated impact of higher discount rates on
asset valuations.
The underlying portfolio was resilient, benefiting from expert
diversification and sound capital management, and demonstrated
improved cash flow generation in the year. InfraRed remains focused
on enhancing portfolio composition as reflected in the high-quality
acquisitions and selective disposals made in the year. This
approach to active management and asset rotation has improved
portfolio diversification and significantly enhanced HICL's
long-term earnings profile.
The quality of the Company's portfolio, expertise of its
Investment Manager and attractions of the core infrastructure
market ensures that HICL remains resilient and well positioned to
pursue its strategy in a range of market conditions.
Operational highlights
The underlying performance of the Company's portfolio was
positive for the year ended 31 March 2023, returning 10.2% (9.6% at
31 March 2022)(1) which drove a Total Shareholder Return(2) of
6.3%, offsetting the increase in the portfolio weighted average
discount rate in the year.
Operational outperformance was driven by the portfolio's 0.8x
correlation to inflation which has been achieved through
disciplined portfolio construction. Actual inflation was ahead of
expectations in the year and benefited the Company's cash flows.
Further details of the drivers of portfolio performance can be
found in the Valuation of the Portfolio section of HICL's 31 March
2023 Annual Report.
Operational performance overview
Operational performance has been in line with the Investment
Manager's expectations for the year. HICL's Public Private
Partnership ("PPP") portfolio (60% of the Directors' Valuation at
31 March 2023; 66% at 31 March 2022) performed well during the
period, benefiting from the inflation linkage built into its
availability-based contracted revenues and highly contracted cost
base, including fixed debt over the life of the project.
The Company's three largest demand-based investments (17% of the
Directors' Valuation at 31 March 2023; 22% at 31 March 2022),
together experienced traffic broadly in line with valuation
assumptions for the year. Wider economic volatility has not had any
material impact on the performance of these investments in the
year, helped by their strategically significant locations and
entrenched demand.
The operational performance of the Company's largest regulated
investment, Affinity Water (7% of the Directors' Valuation at 31
March 2023; 9% at 31 March 2022), was negatively impacted by
unusually adverse weather conditions during the year which resulted
in increased operating costs and incentive regime penalties. This
was offset by the positive impact of actual and forecast inflation,
as well as the reflection of Ofwat's final PR24 methodology and
early view on the allowed return on capital for the next Asset
Management Plan period (2025 - 2030).
Following the completion of Fortysouth (formerly known as
Aotearoa Towers) during the year, InfraRed has been working closely
with One NZ(3) to oversee the transition of the passive
infrastructure. Operational and financial performance over the
period was in line with HICL's acquisition assumptions. HICL's
investment in Texas Nevada Transmission completed after the
year-end, and the business has been performing well since the
commitment was made in summer 2022. InfraRed's local asset
management teams are working closely with both companies to ensure
a smooth transition into the HICL portfolio.
Enhanced disclosure on the operational performance of each of
HICL's Top 10 assets is set out in HICL's 31 March 2023 Annual
Report.
HICL's business model delivering value
The proactive management of the Company's balance sheet and
portfolio composition is central to HICL's business model.
Proactive balance sheet management
Disciplined management of the Company's funding position remains
a priority. In March 2023, the Company's Revolving Credit Facility
(RCF) was renegotiated to increase its capacity to GBP650m and to
extend the tenor to 30 June 2026. This replaced the existing
GBP400m RCF and GBP330m accordion, which was activated in July 2022
to support the Company's attractive short-term investment pipeline.
The new facility, which remains sustainability linked, provides
substantial funding resources and sufficient tenor to support the
Company's strategy.
In May 2023, HICL issued a GBP150m Private Placement, further
diversifying the Company's sources of capital. Proceeds of the
issue will be used to reduce drawings on the Company's RCF, and
extend the maturity and reduce the interest rate risk on the
equivalent drawings. The maturity aligns with the forecast capital
returns from HICL's PPP portfolio to enable the Company to reinvest
this capital ahead of time.
HICL's capitalisation was also supported by an accretive equity
issuance in July 2022 that raised GBP160m and was subject to scale
back. The continued demand from institutional and retail
shareholders demonstrates the support for HICL's strategy and
appetite for the key attributes of core infrastructure.
Accretive investment activity
Acquisition and disposal activity in the year served to improve
portfolio composition, enhance diversification and contribute
significantly to the Company's strategy to increase asset life and
long-term earnings generation within the portfolio.
Three high-quality investments were announced in the year, which
comprised:
-- Fortysouth (New Zealand), a passive mobile tower
infrastructure owner with over 1,500 towers. Completed in November
2022 (6% of the Directors' Valuation);
-- Cross London Trains ("XLT") (UK), a PPP asset comprising 115
electrified trains. Completed in the period (3% of the Directors'
Valuation); and
-- Texas Nevada Transmission ("TNT") (US), spanning two distinct
electricity transmission systems and over 800km of high-voltage
transmission lines. Completion occurred post year-end (6% of the
Directors' Valuation).
In addition, in April 2023 the Company announced the acquisition
of a stake in Altitude Infra, a leading owner/operator of
fibre-to-the-home ("FTTH") in rural France with a total footprint
covering over five million households.
These investments were targeted by InfraRed owing to their
attractive core infrastructure attributes; essential public assets
with contracted and/or regulated cash flows, that enjoy a highly
defensive position in their respective markets. This positioning
extends to the robustness of the investments' capital structures,
with limited refinancing risk, as well as broader protection from
the risk of higher interest rates through inflation-linked cash
flows and, in the case of TNT, a regulated cost of capital. In an
environment of elevated inflation and interest rates, assets that
provide these protections are particularly attractive. These
investments were delivered through InfraRed's deep global
relationships, innovative approach to bidding and strong track
record for execution.
The transaction activity further demonstrates the evolution of
core infrastructure and the compelling set of investment
opportunities arising from modernising global economies. In
particular, the megatrends of digitisation and decarbonisation
provide tailwinds that are expected to support long-term growth in
these recent investments, funded from the assets' existing capital
resources.
Alongside accretive investments, asset disposals provide an
important lever to optimise portfolio construction, realise NAV
outperformance and provide a valuable source of funding for the
Company. In the year, HICL completed the disposal of its 100%
interest in the Queen Alexandra Hospital ("QAH") PPP project,
generating 1.5p of NAV outperformance and GBP108m of proceeds which
were subsequently invested into the accretive acquisitions
described above.
Following the year end, HICL executed an agreement to sell 10%
of its 33.3% shareholding in the Northwest Parkway for a
consideration of USD 86m, achieving a small premium to carrying
value. This sale crystallised a 11.0% holding period IRR since the
initial investment in December 2016 and a 1.8x multiple on cash
invested, demonstrating the continued ability of the Company to
deliver capital growth and compound shareholder returns. As well as
providing a valuable source of funding, the transaction supported
the Directors' Valuation in a period of macroeconomic uncertainty.
Not least, the disposal crystallised the significant valuation
appreciation since acquisition to effectively rotate capital and
optimise HICL's diversification by sector, geography and revenue
type.
Specialist asset management
InfraRed's dedicated team of specialist asset managers is key to
the delivery of investment performance through the investment
lifecycle. The proficient onboarding of new acquisitions has been a
critical asset management activity in the year, delivered via
InfraRed's asset management platforms out of London, New York and
Sydney.
InfraRed's long track record of successfully delivering assets
through construction was demonstrated in the period. On 1 July
2022, Paris-Saclay University commenced operations in line with the
agreed availability date, marking the conclusion of a four-year
construction period. Several key milestones were also achieved at
Blankenburg Tunnel, with works expected to complete on schedule in
2024, notwithstanding supply chain pressures linked to the war in
Ukraine.
Broader active management by InfraRed of physical asset
condition across the PPP portfolio continued over the year. This
included proactive leadership of the delivery of remediation works
where necessary, including identified construction defects. The
value of this work was demonstrated at Pinderfields and Pontefract
Hospitals, where commercial agreement to deliver a major programme
of defect remediation works enabled the resumption of shareholder
distributions in the year and de-risked the future cash flows from
the project.
Extensive collaboration with project partners and wider asset
stakeholders is also key to the effective resolution of broader
industry issues. The Investment Manager maintains its position as a
member of the Infrastructure and Project Authority's ("IPA")
Project Expiry Working Group as well as the IPA's Net Zero Working
Group. At an asset level, InfraRed's dedicated Portfolio Impact
team and strategy facilitates greater collaboration with clients
and other key stakeholders, while delivering for local communities.
More detail is set out in HICL's 2023 Sustainability Report.
Financial highlights
NAV per share increased by 1.8p over the year to 164.9p at 31
March 2023 (31 March 2022: 163.1p).
The movement in the NAV per share in the year was largely
attributable to the portfolio's strong inflation correlation. The
positive portfolio performance was offset by the valuation impact
of an increase in the weighted average portfolio discount rate to
7.2% at 31 March 2023 (6.6% at 31 March 2022). The weighted average
discount rate was increased to recognise elevated government bond
yields throughout the jurisdictions in which HICL invests, as
central banks increased benchmark rates in reaction to high levels
of inflation. There was no material impact to financial performance
from rising interest rates. Overall, HICL's portfolio company
gearing, which stands at 66%, is predominantly fixed-rate and the
Company has limited sensitivity to rising interest rates (see NAV
sensitivity chart on page 50 of HICL's 31 March 2023 Annual
Report).
Dividend guidance
The Board's extended dividend guidance has been developed with
the full support of the Investment Manager. Significant strides
have been made in recent years to diversify, and extend, the
Company's revenue streams through both acquisitions and disposals.
These activities have sought to strike an appropriate balance
between maintaining HICL's high dividend (in relative terms),
prioritising capital preservation and building an enduring platform
for long-term NAV appreciation and dividend growth.
To date this strategy has been carried out effectively. Since
HICL acquired its first non-PPP investments in early 2016, the
Company's weighted average asset life has increased by over 50%,
while inflation correlation has increased by over 30% to 0.8x over
the same timeframe. The latter has served to provide significant
protection to investors over the past year, offsetting the negative
impact of higher interest/discount rates on the portfolio valuation
while also considerably enhancing HICL's future earnings and cash
flow profile. All the while, the Company has continued to pay out
the highest dividend in the core infrastructure peer group.
Short-term distributable cash continues to recover, as reflected
in the further increase in dividend cash cover (1.03x before
profits on disposals), and HICL's asset life is now the highest in
its history. Nevertheless, this period of consolidation remains in
progress and accordingly InfraRed supports the decision to maintain
the dividend at 8.25pps for the year ending 31 March 2025. The
dividend is a material component of HICL's total return profile
which, when coupled with high inflation correlation, the long-term
visibility of portfolio cash flows and potential for NAV growth,
provides a compelling investment proposition for shareholders.
Funding position
As at 31 March the Company's investment entity subsidiary, IILP,
was GBP219m drawn on its RCF, with GBP16m of short-term commitments
at that date. Following year-end transactions, including the
completion of TNT, the completion of Altitude Infra, the agreed
partial disposal of NWP, the Private Placement proceeds and the
expected investment in the Hornsea II OFTO, the Company is expected
to have drawn c.GBP360m on its RCF.
Further information on the investment valuation and financial
performance can be found in Valuation of the Portfolio section of
HICL's 31 March 2023 Annual Report, and the Financial Review
section of HICL's 31 March 2023 Annual Report.
Governance
The Board continues to deliver its succession plan, with Frank
Nelson, HICL's Senior Independent Director (SID), planning to step
down in July 2023. Frank has shown steadfast commitment to the
Company over the nine years of his tenure, and we thank him for his
significant contribution.
At the Investment Manager level, Keith Pickard stepped down from
the HICL Investment Committee upon his retirement from InfraRed in
March 2023. In his stead, Helen Price, CFO for HICL and InfraRed,
joined the HICL Investment Committee in July 2022.
Sustainability
HICL's portfolio has an important social impact. By facilitating
the delivery of essential services in a socially responsible
manner, the Company's underlying assets contribute to many of the
UN SDGs and deliver an inherent social good. However, a genuine
social contribution requires going beyond the reliable provision of
infrastructure. To that extent, InfraRed has created a dedicated
Portfolio Impact team and strategy which aims to drive positive
social outcomes for local communities and to enhance relationships
with public and private sector clients.
During the year, InfraRed published its net zero progress report
setting out interim targets for all funds, incorporating a
proportion of HICL's portfolio which is aligned or aligning to net
zero. Within this framework, HICL has disclosed its own interim
targets, and the entire portfolio is expected to align with
InfraRed's pledge of achieving net zero by 2050 or earlier.
Supporting these initiatives and in line with HICL's active
sustainability strategy, the Investment Manager has achieved key
milestones in data collection and disclosure in the year for the
Company. InfraRed's expanded annual ESG survey has enabled HICL to
expand its suite of sustainability metrics and targets to include
all mandatory PAI(4) indicators under the EU's SFDR regime, an
important part of the Company's wider disclosure as an Article 8
fund.
Sustainability Highlights are provided in HICL's 31 March 2023
Annual Report. Full details are set out in the Company's 2023
Sustainability Report, available on the HICL website.
Key risks
HICL's risk appetite statement, approach to risk management and
governance structure are set out in Risk and Risk Management of
HICL's 31 March 2023 Annual Report.
The Investment Manager's view on the performance of key risks in
the year is set out below.
Political and regulatory risk
Geopolitics
Geopolitical risk was elevated in the period, reflecting the
continuing war in Ukraine. The Company is not directly exposed to
the region, either via its investment portfolio or its shareholder
register. The secondary impacts of the conflict, including supply
chain disruption, increased energy costs and materials inflation
have had a limited impact on a subset of projects during the
period, with risks to equity mitigated through contractual
pass-through mechanisms.
Political risk also manifested in the UK, with two changes of
Prime Minister in the year. The political situation has since
stabilised, with the next general election to be held no later than
January 2025. The broader need for infrastructure procurement
enjoys bipartisan political support, though specific areas of
policy focus undoubtedly vary. The Investment Manager continues to
judge UK political risk as low. Notwithstanding that, the rationale
for portfolio diversification, including across clients, sectors
and countries, remains strong and is a key feature of HICL's
offering and strategy.
PFI handback
The process whereby PFI projects revert to public ownership is
expected to gather momentum over the next decade. Ensuring the
smooth transition of assets over time is therefore a prominent
issue for all PFI stakeholders, public and private sectors alike.
InfraRed enjoys representation in the IPA's dedicated working group
on this project, as well as the IPA's equity sponsor steering
group, and a HICL asset participated in an IPA-sponsored mid-life
contractual review in the year. The Investment Manager launched its
own rolling programme of handback preparedness reviews, which
focuses initially on the 29 projects due to be handed back in the
next ten years (representing 11% of the Directors' Valuation at 31
March 2023). This exercise will guide InfraRed's planning and asset
management design around this risk.
Client relationships
There continue to be risks inherent in long-term partnership
frameworks, particularly in the context of broader operating and
financial pressures across the UK public sector. In specific cases
this has resulted in more adversarial forms of contract management,
particularly in a subset of the Company's UK healthcare projects.
Though this remains immaterial to the portfolio, the risk for
further instances of this behaviour exists, including the
non-payment of contracted revenues, which could pose a risk to the
Company's cash flow.
Regulation
The Company has six assets classified as being subject to
regulatory oversight, though the nature and extent of this varies
significantly across the assets. Notably, Affinity Water is
approaching a periodic price review by Ofwat, the UK water
regulator in 2024 (PR24) which is discussed further in the Top 10
assets - Operational Review, located in the 2023 Annual Report. The
Investment Manager notes regulatory and political overtures
regarding historic under-investment in the sector and the potential
for a more penal operating regime from 2025 onwards. InfraRed
enjoys a productive dialogue with Ofwat, plays an important role in
relevant industry forums and believes that this risk is reflected
appropriately in the Directors' Valuation.
Demand risk and consumer behaviour
The acute risk posed by Covid-19 travel restrictions on HICL's
demand-based assets has significantly reduced. This has enabled a
greater degree of visibility over potential long-term fluctuations
to usage patterns, driven by factors such as shifting working
patterns as a result of Covid-19 and the decarbonisation of
transport. An estimate of this impact has been incorporated into
the long-term revenue forecasts for Northwest Parkway and HS1. Risk
remains that current demand forecasts do not accurately reflect
shifts in usage patterns for HICL's demand-based assets. The
strategic positioning, long traffic histories and entrenched demand
enjoyed by HICL's demand-based assets mitigates this risk.
Macroeconomic risk
The returns from HICL's core infrastructure portfolio are
significantly positively correlated to inflation at 0.8x over the
long term. Recognising the current high inflationary environment,
NAV and cash flow sensitivities have been calculated. Where
inflation is higher than HICL's valuation assumptions by 3% for the
next three years, NAV would increase by 10.5p per share.
Discount rates used to value core infrastructure assets did not
fully reflect the significant decrease in risk-free rates observed
over the last decade, serving to increase the implied equity risk
premium to historically high levels. This anticipation of a
normalisation of the interest rate environment insulated the
portfolio valuation from the full impact of the volatility of
risk-free rates. Notwithstanding this, HICL increased its weighted
average discount rate by 60bps over the year. The current implied
equity risk premium of 3.5% remains appropriate and commensurate
with HICL's risk positioning and long track record of delivering
for shareholders.
Market and outlook
During a period of heightened geopolitical and macroeconomic
uncertainty, the Company's portfolio has again demonstrated its
resilience. Volatile periods such as this serve to underscore the
importance of the disciplined portfolio construction and expert
diversification that underpin HICL's continued ability to deliver
long-term outperformance.
The Company is well positioned to continue delivering its
strategy. HICL's strong inflation linkage, prudent approach to
managing its balance sheet and established track record of
delivering yield and capital growth, ensure that HICL remains a
compelling all-weather investment and a valuable diversifier for
investor portfolios.
InfraRed continues to identify and pursue opportunities to
manage portfolio composition and improve key portfolio metrics
through highly selective acquisitions and disposals. In this task,
InfraRed remains focused on ensuring that HICL is well positioned
for the future as its PPP concessions approach their capital
redemption phase. This necessitates proactive management, and
careful consideration of the relative merits of short-term yield as
against an enhanced longer-term earnings profile, such that HICL
continues to deliver its compelling investment proposition for
decades to come.
The Company's vision, to deliver strong social foundations,
connect communities and support sustainable modern economies guides
HICL's investment ambition. This vision connects with powerful
megatrends of digitalisation and decarbonisation (see
Infrastructure Market section in HICL's 31 March 2023 Annual
Report) which continue to drive infrastructure development and
provide significant opportunity for investment. Strong investment
discipline, aided by HICL's core infrastructure framework, and
InfraRed's differentiated capability to source opportunities, stand
the Company in good stead to deliver its strategy.
HICL has a portfolio of diversified assets with attractive core
infrastructure characteristics, in a sector buoyed by powerful
growth drivers. Together these underscore the compelling nature of
HICL's investment proposition today and into the future.
Investment Manager's Report footnotes
1. Performance of the portfolio relative to the opening weighted
average discount rate
2. Based on interim dividends paid plus change in NAV per share
in the year, divided by opening NAV per share
3. Formerly known as Vodafone New Zealand
4. Principal Adverse Impact
Responsibility statement of the Directors in respect of the
annual financial report
We confirm that to the best of our knowledge:
-- the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss
of the Company; and
-- the Strategic Report/Directors' Report includes a fair review
of the development and performance of the business and the position
of the issuer, together with a description of the principal risks
and uncertainties that they face.
We consider the Annual Report and accounts, taken as a whole, is
fair, balanced and understandable and provides the information
necessary for shareholders to assess the Company's position and
performance, business model and strategy.
In accordance with Disclosure Guidance and Transparency Rule
4.1.14R, the financial statements will form part of the annual
financial report prepared using the single electronic reporting
format under the TD ESEF Regulation. The auditor's report on these
financial statements provides no assurance over the ESEF
format.
By order of the Board
Authorised signatory
Aztec Financial Services (UK) Limited
Company Secretary
23 May 2023
Publication of documentation
The above information is an extract of information from HICL's
Annual Report. The Annual Report has been submitted to the National
Storage Mechanism and will shortly be available for inspection at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism . It can
also be obtained from the Company Secretary or from the Investors
section of the Company's website, at www.HICL.com . A direct link
to the PDF of the Annual Report is also included here :
https://www.hicl.com/AnnualReport2023
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