REG - HICL Infrastructure - Interim Update Statement

HICL InfrastructureAnnouncement

01/08/2023 07:00

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RNS Number : 8183H  HICL Infrastructure PLC  01 August 2023

1 August 2023

 

HICL Infrastructure PLC

 

"HICL" or "the Company" and, together with its subsidiaries, "the Group", the
London-listed infrastructure investment company managed by InfraRed Capital
Partners Limited ("InfraRed" or "the Investment Manager".)

 

 

Interim Update Statement

 

The Board of HICL is issuing this Interim Update Statement, which relates to
the period from 1 April 2023 to 31 July 2023.

 

Mike Bane, Chair of HICL said:

 

"HICL's portfolio performed well over the period owing to its defensive
positioning and strong inflation correlation, which serve to protect the
Company's NAV in the current macro environment. The Company continues to
deliver on its asset recycling strategy, which enhances portfolio composition
and supports asset valuations as well as providing a valuable source of
funding when equity capital markets are closed."

 

 

Key Highlights

 ●    Good operational performance across the portfolio in the period demonstrating
      the resilient nature of the underlying assets. The Company is on track to
      deliver its target dividend of 8.25p per share for the financial year to 31
      March 2024, with cash generation in line with expectations.

 ●    High Speed 1, which represents 4% of the portfolio(1), recommenced
      distributions in the period demonstrating the asset's continued recovery from
      the effects of Covid-19.

 ●    The partial disposal of Northwest Parkway ("NWP") above its carrying value
      completed in June 2023. The Company has other live disposal activity which
      will continue to enhance portfolio composition, while also providing support
      for valuations and cash proceeds to reduce drawings on HICL's Revolving Credit
      Facility ("RCF").

 ●    HICL completed its previously disclosed investments in Texas Nevada
      Transmission, Altitude Infra in May and the Hornsea II OFTO in July.

 ●    The prospect of higher UK interest rates has continued to weigh on the
      Company's share price, which has consistently traded at a discount to NAV over
      the period. In the Board's view, the Company's current share rating does not
      fully reflect the positive impact of higher than assumed inflation on HICL's
      cashflows.

 ●    HICL's defensive portfolio continues to be well positioned amidst the
      uncertain macro environment, benefiting from its strong inflation correlation
      and limited variable interest rate exposure.

 

Portfolio Performance

 

 ●    Overall, the portfolio performed in line with expectations in the period,
      underpinned by high quality cashflows, long-term capital structures with
      limited exposure to higher interest rates and active asset management.

 ●    Affinity Water (7% of portfolio value(1)) performed well operationally in the
      period, aided by mild weather. The business has a stable financial position,
      enhanced by the continuing reinvestment of free cash into Affinity's
      substantial investment programme, reducing external gearing, as well as
      effective treasury management with no refinancing events before 2027. As a
      water-only company with no exposure to sewerage services, Affinity Water is
      also not impacted by some of the specific operational challenges in the
      wastewater sector.

 ●    First distributions received in the period for Texas Nevada Transmission (USA)
      and Fortysouth (NZ), in line with acquisition assumptions.

 

Financial Performance

 

 ●    The Company is on track to deliver its target dividend of 8.25p per share for
      the financial year to 31 March 2024(2), with cash generation in the period in
      line with expectations.

 ●    The Company has received the proceeds from its Northwest Parkway disposal.
      These proceeds were fully hedged with a FX forward which settled on 31 July
      2023. In August 2023 these proceeds will be used to repay a portion of the
      RCF. By 31 August 2023,  the drawn balance on the Company's £650m RCF will
      be £370m.  Together with the Private Placement and letters of credit, the
      Company's gearing will be 16%. To protect against further rises in interest
      rates, but allow it to benefit if rates decrease, the Company purchased an
      option to cap £200m of its SONIA exposure to 6.5% for three years.

 ●    The portfolio has low cashflow exposure to rising interest rates, with the
      vast majority of portfolio holdings benefiting from fixed-rate, amortising
      debt. Five assets have exposure to debt refinancing, with only one due to be
      refinanced before 2027. For reference, plus / minus 100bps on the cost of debt
      for all future refinancings in the portfolio would negatively / positively
      impact HICL's NAV per share by (1.7p) / 2.1p respectively.

 ●    Higher interest rates also flow through to cash on deposit within underlying
      portfolio companies. For reference, plus / minus 100bps on the rate attracted
      by deposits placed by portfolio companies would positively / negatively impact
      HICL's NAV per share by 2.8p / (2.8p) respectively.

 

Valuation

 

 ●    The Investment Manager continues to observe a material disconnect between
      public and private markets in the valuations applied to inflation-correlated
      core infrastructure assets.  Transaction data points in private markets,
      albeit in lower volumes, support the view that valuations are generally
      remaining stable as inflation correlation provides a hedge against higher
      discount rates. This is further validated by the valuations seen across the
      Company's NWP sale, a recent UK PPP sale by a separate InfraRed-managed fund,
      and HICL's live disposal activity.

 ●    However, public markets appear to be applying higher UK Gilt yields to
      perceived discount rates for alternative asset funds without a corresponding
      adjustment for the benefit of inflation.  The implied inflation rate in the
      long-term (30 year) UK government bond yield is currently c. 3.4%(3), which
      compares to the Company's long term UK inflation assumption in its 31 March
      2023 valuation of 2%.

 ●    Aligning HICL's long-term inflation assumptions(4) to the implied inflation
      rates in current long-term government bond yields across HICL's markets, would
      result in a 21.4p uplift in NAV, based on the 31 March 2023 valuation. To
      remain NAV neutral, this equates to an equivalent increase in the Company's
      weighted average discount rate of 1.1% to 8.3%.

 ●    In the short-term, current inflation forecasts for FY2024 remain significantly
      ahead of the UK RPI assumptions(4) for the year ended 31 March 2024.  For
      reference, if inflation is 3% higher than the Company's forecast assumptions
      until March 2024 in all jurisdictions, then 3.1p will be added to its NAV per
      share.

 ●    Overall, the weighted average risk-free rate across HICL's markets has
      increased by 0.6% since the Company's valuation at 31 March 2023. All things
      being equal, this would suggest the adoption of higher discount rates,
      weighted towards the UK, for HICL's next valuation at 30 September 2023. The
      valuation impact of this is expected to be materially offset by the impact of
      higher actual and forecast inflation. This offsetting effect for
      inflation-correlated core infrastructure aligns with transaction data points
      observed by InfraRed in the market.

 

Market and Outlook

 

 ●    HICL's portfolio continues to perform well amidst macroeconomic volatility.
      Underlying asset valuations are resilient, with limited cashflow sensitivity
      to higher interest rates, and strong inflation correlation providing an
      effective hedge against the risk of higher discount rates.

 ●    The Board and Investment Manager are focused on conservative capital
      management, including the application of disposal proceeds to reduce the
      drawings on the Company's RCF. This strategy of asset recycling allows the
      Company to continue to refine portfolio composition and enhance the investment
      proposition for shareholders.

 ●    Over the medium-term, core infrastructure investment continues to be propelled
      by the powerful growth drivers of digitalisation, decarbonisation and the need
      to renew ageing infrastructure.

 

 

1.     Based on the Directors' Valuation of £3,772.8m at 31 March 2023

2.     This is target only and not a profit forecast. There can be no
assurance that this target will be met

3.     As at 31 July 2023

4.     UK RPI 5.00% to March 2024, 2.75% to March 2030, 2.00% thereafter,
CPI: 4.25% to March 2024, 2.00% thereafter. The inflation assumptions for the
rest of the world are shown on page 49 of the 2023 Annual Report and Accounts

 

 

-Ends-

 

 

 

Enquiries

 InfraRed Capital Partners Limited  +44 (0) 20 7484 1800 / info@hicl.com (mailto:info@hicl.com)
 Edward Hunt
 Helen Price
 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 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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