REG - HICL Infrastructure - Interim Statement and Capital Allocation Update
03/03/2025 07:15
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RNS Number : 0522Z HICL Infrastructure PLC 03 March 2025
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3 March 2025
HICL Infrastructure PLC
"HICL" or the "Company" and, together with its corporate subsidiaries, the
"Group", the London-listed infrastructure investment company managed by
InfraRed Capital Partners Limited ("InfraRed" or the "Investment Manager").
Interim Update Statement and Capital Allocation Update
The Board of HICL is issuing this Interim Update Statement, which relates to
the period from 1 October 2024 to 28 February 2025. It includes an update on
the Company's approach to Capital Allocation.
Mike Bane, Chair of HICL, said:
"HICL's high-quality portfolio continues to demonstrate resilient performance
despite broader macro and political volatility. The Board is pleased to
announce an immediate and significant expansion of the Company's share buyback
programme taking advantage of the weakness in the Company's share price. This
will be funded by further targeted asset sales and, if necessary in the short
term, the Company's unutilised Revolving Credit Facility."
Key Highlights
· Operational performance across the portfolio was in line with expectations,
with Affinity Water receiving its final regulatory determination which will
enable the resumption of distributions in the financial year ending March
2026.
· The Board announces a significant expansion of the Company's buyback programme
by a further £100m, commencing today and running to 31 December 2025. This
builds on the initial £50m share buyback programme which completed last week.
· Targeted divestments in excess of £200m will be pursued in the coming year to
fund the buyback expansion and the existing investment commitments of c.
£110m. The Company will use up to £50m of its Revolving Credit Facility
("RCF") capacity to bridge to the receipt of disposal proceeds.
· The Company remains on track to deliver its target dividend of 8.25p per share
for the financial year to 31 March 2025, with cash generation in the period in
line with expectations. Forecast dividend cash cover for the year to 31 March
2025 is also expected to be in line with previous guidance. Further dividend
guidance is expected to be provided in May.
· Compared with 30 September 2024, risk-free rates have increased across HICL's
core jurisdictions, most notably in the UK and US. All else being equal, were
the discount rate to be increased in the UK and US by between 20 and 40 basis
points, this would translate to an overall NAV reduction of between c. 2p and
c. 4p per share. However, there are also recent, relevant transaction data
which support HICL's current discount rates.
· Mark Tiner has joined InfraRed as the new CFO for HICL effective as of 24
February 2025. Mark was previously CFO of Cordiant Digital Infrastructure
Limited.
· Following a robust tender process, and to ensure auditor rotation obligations
are met, the Board intends to appoint Deloitte LLP as the Company's new
auditor, for the financial year starting 1 April 2025, subject to shareholder
approval at the 2025 Annual General Meeting.
Portfolio Performance
· Operational performance across the portfolio in the period was in line with
expectations, demonstrating the resilient nature of the underlying assets.
Notable updates are included below.
· Ofwat published its final determination for AMP8 (2025-2030) for Affinity
Water in the period, which was formally accepted by the company on 17 February
2025. The final determination reflects several positive movements by Ofwat
which are expected to lead to a modest increase in the overall valuation of
the business. These movements include:
- The allowed WACC of 4.03% in real terms has increased from Ofwat's draft
determination WACC of 3.72%, which was adopted in HICL's September 2024
valuation.
- The total allowed expenditure of £2.34bn over the five-year period is
significantly higher (+23%) than the draft determination allowance of
£1.90bn.
- Ofwat has removed proposals for a gearing cap of 70% and associated dividend
restrictions. Nevertheless, the focus of rating agencies on financial
resilience is expected to require a further deleveraging of the business in
AMP8, which runs until 2030.
· As a result of the final determination, HICL expects that dividends from
Affinity Water will resume during the financial year ending 31 March 2026. In
line with previous disclosure, HICL has now formally committed to support
future growth in the business with a c. £50m equity investment, expected to
be made before 31 March 2026.
· In January, High Speed 1 (which recently rebranded to London St. Pancras
Highspeed) also received a positive regulatory determination from the Office
of Road and Rail. The lower maintenance costs required over the next five
years reflect the high quality of the physical assets and will result in
reduced track access charges payable by train operators. The track access
charges within the scope of the regulatory review are passed through to
Network Rail High Speed so there is no direct impact on the company. However,
lower track access charges may have a positive impact on the number of train
paths booked in the medium-term, particularly in the context of discussions
with potential new international operators which continue to progress.
· Texas Nevada Transmission submitted its draft rate case for Cross Texas
Transmission to its regulator, setting out planned spending over the next five
years. A decision is expected by the end of June 2025.
· HICL's PPP assets performed in line with expectations, including those UK PPPs
where specific adjustments to forecast costs were made as part of the 30
September 2024 valuation.
Capital Allocation and Buyback Updates
· The Company completed its initial £50m share buyback programme on 28 February
2025. As at 28 February 2025, 41,366,815 shares have been re-purchased and are
held in treasury. This has created 0.7p of NAV accretion for shareholders.
· In light of the significant discount to NAV at which the Company's shares have
continued to trade, the Board is announcing the deployment of a further £100m
towards share buybacks to commence from today running to the end of the
calendar year. The return currently implied on the repurchase of the Company's
shares is 11.0%(1), which offers a compelling return over alternative uses of
capital.
· To fund this expanded programme and to meet the Company's upcoming investment
commitments, the Investment Manager is targeting in excess of £200m of
disposals during the year. This builds on its track record of securing
attractive pricing on over £500m of accretive disposals since March 2023.
· Recognising the value of share buybacks at the current share price, and given
the confidence of the Investment Manager in delivering the targeted disposals,
the Board has determined to utilise HICL's RCF to bridge between share
buybacks and future disposal proceeds up to £50m and where the discount to
NAV is greater than 15% at the time of drawing.
· The Company's £400m RCF is currently undrawn and matures on 30 June 2026.
Discussions to extend the term of the facility have commenced and are expected
to be concluded by May 2025.
· New investments in the financial year ending March 2026 are expected to be
limited to existing commitments of c. £50m, which is to support Affinity
Water's investment programme. Beyond this, in the financial year ending March
2027, HICL has long-standing commitments of c. £60m relating to the funding
of Blankenberg Tunnel and the B247 road following the completion of their
construction phases.
· Should the Investment Manager materially exceed the £200m target for
disposals, the Board will consider the application of excess proceeds in line
with its disciplined capital allocation framework. This will include
consideration of selective acquisition activity alongside further share
buybacks.
Financial Performance and Valuation
· The Company is on track to deliver its target dividend of 8.25p per share for
the financial year to 31 March 2025, with cash generation in the year in line
with expectations. Forecast dividend cash cover for the year to 31 March 2025
is also expected to be in line with previous guidance. The Board expects to
provide further dividend guidance in the annual results in May 2025.
· Inflation for the six months to 31 March 2025 is tracking slightly ahead of
the assumptions used in the Company's 30 September 2024 valuation for the UK
and USA, and slightly behind the assumptions used for the Eurozone and New
Zealand. If this trend were to continue, it would be expected to result in a
positive impact on NAV per share of c. 0.3p.
· Long-term government bond yields in the UK and USA have increased by c. 50
basis points since the Company's valuation at 30 September 2024 with smaller
increases observed in the Eurozone, New Zealand and Canada. Should risk-free
rates persist at these levels, the equity risk premium implied in the
Company's discount rate would reduce. In assessing the adequacy of the equity
risk premium across the portfolio, the Company will consider the movement in
implied equity risk premium versus the prior reporting date of 30 September
2024, as well as the previous high watermark for government bond yields at 30
September 2023, where HICL last increased reference discount rates. This
analysis is set out in the table below:
30 September 30 September 28 February
2023
2024
2025
Weighted Average 8.0% 8.1% 8.1%
Discount Rate
Weighted Average Long-Term Government Bond Yield(2) 4.7% 4.2% 4.7%
Weighted Average Equity Risk Premium 3.3% 3.9% 3.4%
· In addition to the above portfolio analysis, the Company will evaluate the
implied equity risk premium in each of HICL's core markets so that significant
country-specific increases in risk-free rates are duly considered and will
also take into consideration the risk premium implied in HICL's current share
rating. The more significant increases in long-term government bond yields in
the USA and UK since 30 September 2024 are notable; an increase of between 20
and 40 basis points in the discount rate for those two jurisdictions would
translate to an overall NAV reduction of between c. 2p and c. 4p per share.
The Board will continue to evaluate this position as further data becomes
available ahead of 31 March 2025.
· Finally, pricing data points from market transactions provide a pertinent
input to the adequacy of the Company's discount rate. The recently announced
cash offer for BBGI Global Infrastructure S.A. provides a highly relevant data
point for the Company's PPP portfolio and appears to be strongly supportive of
HICL's valuation approach for these assets. Beyond this, the number of
relevant infrastructure transactions observed in private markets continues to
trend below longer-term averages, with wider variability in competitive
tension for assets.
Market and Outlook
· The Board has taken the capital allocation decisions outlined in this
announcement because of the discount at which the Company's shares trade.
Transactions that we have undertaken, as well as those seen in the wider
market, clearly evidence the intrinsic value of HICL's portfolio and we
continue to expect to take advantage of this dynamic to drive greater returns
to shareholders.
· The underlying portfolio has remained insulated from macro and political
volatility in the period and continues to perform well. Cashflow growth is in
line with expectations and continues a positive trend, which will be enhanced
by the resumption of distributions from Affinity Water. The Board expects to
provide further dividend guidance in the Company's Annual Results, scheduled
to be announced in May.
· The broader market and political backdrop for private investment in
infrastructure remains supportive. The Company is encouraged by the positive
political rhetoric in support of private investment in infrastructure,
particularly in the UK, and its critical role in delivering much needed
economic growth. This approach is expected to benefit existing holdings as
well as provide new opportunities for selective investment.
· The Investment Manager sees attractive investment opportunities for the
Company, including the repurchase of the Company's own shares where these
offer a superior risk and return proposition. Disciplined capital allocation
remains front of mind and the Board is focused on delivering the significant
capital allocation plan set out in this Interim Update Statement in support of
the Company's share price.
-Ends-
(1) Based on the discount rate, adjusted to reflect the share price discount
to the NAV using published discount rate sensitivities as at 30 September
2024, gross of any costs of borrowing against the Company's RCF.
(2) Geographically weighted average calculated using an average of 20-year and
30-year government bond yields as at 28 February 2025.
( )
Enquiries
InfraRed Capital Partners Limited +44 (0) 20 7484 1800 / info@hicl.com (mailto:info@hicl.com)
Edward Hunt
Mark Tiner
Mohammed Zaheer
Brunswick +44 (0) 20 7404 5959 / hicl@brunswickgroup.com
(mailto:hicl@brunswickgroup.com)
Sofie Brewis
Investec Bank plc +44(0) 20 7597 4952
David Yovichic
RBC Capital Markets +44 (0) 20 7653 4000
Matthew Coakes
Elizabeth Evans
Aztec Financial Services (UK) Limited +44(0) 203 818 0246
Chris Copperwaite
Sarah Felmingham
HICL Infrastructure PLC
HICL Infrastructure PLC ("HICL") is a long-term investor in infrastructure
assets which are predominantly operational and yielding steady returns. It was
the first infrastructure investment company to be listed on the London Stock
Exchange.
With a current portfolio of over 100 infrastructure investments, HICL is
seeking further suitable opportunities in core infrastructure, which are
inherently positioned at the lower end of the risk spectrum.
Further details can be found on the HICL website www.hicl.com
(http://www.hicl.com/) .
Investment Manager (InfraRed Capital Partners)
The Investment Manager to HICL is InfraRed Capital Partners Limited
("InfraRed") which has successfully invested in infrastructure projects since
1997. InfraRed is a leading international investment manager, operating
worldwide from offices in London, New York, Seoul, Madrid and Sydney and
managing equity capital in multiple private and listed funds, primarily for
institutional investors across the globe. InfraRed is authorised and regulated
by the Financial Conduct Authority.
The infrastructure investment team at InfraRed consists of over 100 investment
professionals, all with an infrastructure investment background and a broad
range of relevant skills, including private equity, structured finance,
construction, renewable energy and facilities management.
InfraRed implements best-in-class practices to underpin asset management and
investment decisions, promotes ethical behaviour and has established community
engagement initiatives to support good causes in the wider community. InfraRed
is a signatory of the Principles of Responsible Investment.
Further details can be found on InfraRed's website www.ircp.com
(http://www.ircp.com/) .
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