22
May 2024
HICL Infrastructure
PLC
ANNUAL RESULTS FOR THE YEAR
ENDED 31 MARCH 2024
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 2024. The Annual Report and Accounts
are available at the following link: https://www.hicl.com/AnnualReport2024
Highlights
For the year ended 31 March
2024
·
|
The Company's NAV per share
decreased by 6.7p over the year to 158.2p
at 31 March 2024, principally driven by the
increase in the portfolio's weighted average discount rate to
8.0%.
|
·
|
New dividend guidance of
8.35pps for FY
20261 and reaffirmed guidance of 8.25pps for the year to 31 March
20251. The return to dividend growth reflects the
Board's confidence in HICL's future distributable cash flow and
long-term earnings profile.
|
·
|
Significant progress made on the
Company's strategy with a combined £736m of accretive transactions
announced in the year:
|
|
o
|
£509m of asset divestments, at a
weighted average 11% premium to carrying value, adding c. 2.5p to
HICL's NAV per share; and
|
|
o
|
£227m of targeted investments in
three assets, adding c. 0.7p to NAV per share.
|
·
|
Evidenced the robustness of the
Company's NAV by selling 13.5%2 of the portfolio at or
above carrying value and covering a range of sectors and
geographies.
|
·
|
Sales proceeds from the divestments
enabled the Company's Revolving Credit Facility (RCF) to be repaid
in May 2024, down from a peak of £494m in April 2023 and a £50m
share buyback programme.
|
|
o
|
The Board believes that HICL remains
materially undervalued and therefore the risk-adjusted value of
investing in HICL's own portfolio is compelling.
|
·
|
Published HICL's 2024 Sustainability
Report, which can be found at: https://www.hicl.com/SustainabilityReport2024
|
·
|
The outlook for the Company is
positive and the portfolio continues to perform well in a
challenging macroeconomic environment. Active management during the
year has provided HICL with the financial strength and flexibility
to continue to execute its strategy and deliver an attractive
investment proposition for HICL shareholders over the
long-term.
|
1.
Expressed in pence per Ordinary Share for the
financial year ending 31 March. This is a target only and not a
profit forecast. There can be no assurance that this target will be
met
2.
Calculated based on the Directors' Valuation at 31
March 2023
Summary Financial Results
(On
an Investment Basis1)
for the year
to
|
31 March 2024
|
31 March 2023
|
|
|
|
Income2,3
|
£105.4m
|
£254.2m
|
Profit before tax
("PBT")4
|
£30.6m
|
£198.5m
|
Earnings per share ("EPS")
|
1.5p
|
9.9p
|
Dividend per share
|
8.25p
|
8.25p
|
1. The
Investment Basis is an Alternative Performance Measure. An
explanation of the Investment Basis and a reconciliation to IFRS
can be found in the Financial Review on pages 40 to 45 of the 2024
Annual Report. The basis for calculation is the same as prior
years.
2. Includes
net foreign exchange loss of £9.8m (2023: gain of
£26.3m)
3. Income
was £35.2m on an IFRS Basis (2023: £202.3m)
4. PBT was
£30.5m on an IFRS Basis (2023: £198.5m)
|
Net
Asset Values
|
31 March 2024
|
31 March 2023
|
Net Asset Value ("NAV") per share
|
158.2p
|
164.9p
|
Q4 Dividend
|
2.07p
|
2.07p
|
NAV per share after deducting Q4
dividend
|
156.1p
|
162.8p
|
Mike Bane, Chair of HICL,
said:
"I am pleased to present yet another
resilient set of results for HICL. The significant level of
transactions completed over the year has materially reduced gearing
and enabled a share buyback programme, whilst enhanced cashflow
generation and improved prospects for longer term earnings support
a return to sustainable dividend growth."
Edward Hunt, Head of Core
Infrastructure Funds at InfraRed Capital Partners, HICL's
Investment Manager added:
"Underlying portfolio performance
was resilient, helping to offset the impact of an increase in
portfolio discount rates that reduced NAV overall. Delivering a
portfolio return of 9.0% in a challenging environment demonstrates
the robust nature of the Company's investments and InfraRed's
active management approach. This was strongly supported with £736m
of accretive asset rotation in the year, with over £500m of
disposals achieving an average 11% premium to carrying value. This
activity improved key portfolio metrics, captured value from market
dislocation and supports the Company's ability to deliver long-term
income and capital growth for shareholders."
Chair's Statement
I am pleased to present resilient
annual results for HICL. The significant level of transactions
completed over the year has materially reduced gearing and enabled
a share buyback programme, whilst enhanced cash flow generation and
improved prospects for longer-term earnings support a return to
sustainable dividend growth.
With the uncertain macroeconomic backdrop
persisting, the Board and Investment Manager prioritised balance
sheet management and disciplined capital allocation in the year.
The acceleration of HICL's (HICL Infrastructure PLC and its
subsidiaries, defined as "HICL" or "the Group")1
strategic asset disposal programme, generating over £500m of
proceeds, will enable the complete repayment of HICL's Revolving
Credit Facility ("RCF") and the launch of a £50m share buyback.
These are responsible, long-term decisions which have created value
and demonstrate the Board's approach to capital
allocation.
HICL's diversified portfolio of high-quality
core infrastructure assets is, by design, substantially insulated
from market volatility and performed in line with expectations
during the period. Despite this, the Company's2 shares
have traded at a significant discount to their Net Asset Value
("NAV"). The Board and Investment Manager have been aligned in
their view that sustained transaction activity is fundamental to
demonstrating the robustness of the Company's valuation. With this
in mind, HICL disposed of nine assets, all at or above carrying
value and representing 13.5% of the opening investment portfolio by
value. The most recent was Northwest Parkway in February 2024 at a
30% premium to its most recent valuation. These transactions
reinforce the Board's conviction that the Company's stock remains
materially undervalued.
The share price at 31 March 2024 implies a
long-term expected return from the portfolio of 8.9% p.a. net of
costs, representing a 4.8% implied equity risk premium which has
widened by 60bps since the Company's interim results at 30
September 20233. The Board believes this represents
compelling risk-adjusted value, as demonstrated by its commitment
to undertake up to £50m in share buybacks over a 12-month
period.
Financial performance
HICL's NAV per share at 31 March 2024 was
158.2p (March 2023: 164.9p). This resilient result was underpinned
by the underlying return from the portfolio of 9.0% (March 2023:
10.2%), which exceeded HICL's weighted average discount rate of
7.2% as at 31 March 2023. This outperformance was offset by the
effects of macroeconomic assumptions, particularly increased
discount rates, which resulted in earnings per share for the year
of 1.5p (March 2023: earnings of 9.9p). Total Shareholder Return
("TSR") was 1.0%4 (March 2023: 6.3%).
The primary driver of the decrease in NAV per
share in the year was an 80bps increase in the weighted average
discount rate used to value the portfolio, reflecting increased
long-term government bond yields in HICL's key markets. This was
materially offset by higher near-term forecast inflation rates as
well as profitable transaction activity in the year.
A more detailed explanation of the portfolio's
valuation and discount rate movements over the year is given in the
Valuation of the Portfolio section, starting on page 46 of the full
Annual Report linked above.
Business model in action
Accretive asset rotation has long been a key
component of HICL's differentiated strategy, with 26 disposals
contributing over 10.1p to NAV per share since its IPO in 2006.
During the year, the Board and Investment Manager accelerated
HICL's disposal programme across a range of sectors and geographies
generating over £500m in cash proceeds. This decisive action
enabled HICL to self-fund portfolio evolution, repay the RCF and
launch a £50m buyback programme.
The combined £736m of transactions announced
during the year have contributed c.3.3p to HICL's NAV per share,
improved portfolio composition and contributed positively to key
portfolio metrics.
More information on these transactions can be
found in the Investment Manager's Report starting on page 20 of the
full Annual Report linked above.
Portfolio evolution
HICL's strategic approach to portfolio
construction underpins its ability to deliver an attractive
investment proposition for decades to come. Careful and considered
transaction activity in recent years has deliberately extended
HICL's revenue streams, introducing assets positioned to capture
real growth and to balance the increasing maturity of the Group's
PPP concessions.
This strategic evolution is now reflected in
HICL's asset base: mature shorter-life assets providing a strong
yield ("Yielders"), complemented by assets with longer asset life,
stronger inflation correlation and greater growth potential
("Growers"). HICL's Yielders deliver a forecast 10-year cash yield
of c.10% against a weighted average life of 14 years, contrasted
with HICL's Growers which are forecast to deliver a 10-year growth
rate of 7% p.a. and benefit from a weighted average asset life of
48 years. The combination of these two asset groups provides a
robust and enduring earnings platform from which the Company
expects to deliver dividend and NAV growth for shareholders over
the long term.
Return to dividend growth
The Board reconfirms the dividend guidance of
8.25pps for the year to 31 March 2025, and is pleased to issue new
dividend guidance of 8.35pps for the year to 31 March 2026,
signifying a return to sustainable, long-term dividend
growth5.
The Board recognises the important role played
by the Company's dividend in delivering its compelling total return
proposition, and remains focused on providing investors with an
attractive income stream alongside a growing earnings base. This
approach requires appropriate balance, over the long term, between
distributions to shareholders and reinvestment for future
growth.
The impact of high inflation over the past 18
months is increasingly flowing through into higher cash receipts
across the portfolio, and is supported by real growth in HICL's
demand-based assets, all of which are now making regular
distributions. In addition, the asset rotation undertaken in the
year has improved the portfolio's yield profile. Together this
provides the Board with the confidence that dividend cash cover
will continue to improve in the coming years and that a growing
dividend will be appropriately supported both by cash and earnings
over the long term.
The Board will continue to assess the ability
for further dividend growth over the coming year, as Affinity Water
progresses through its regulatory review.
Sustainability progress
HICL's critical infrastructure investments form
the foundations of societies, economies and local communities. The
Group's assets respond to fundamental socioeconomic needs and
provide critical services. Over 35 million people worldwide use
HICL's assets in their daily lives, with the underlying assets
employing over 2,300 people directly and thousands more through
their supply chains. The Board recognises that positive outcomes
for HICL shareholders are intrinsically linked to positive outcomes
for the communities served by HICL's assets.
The Board's strategy is to improve both the
impact and disclosure of HICL's sustainability approach.
Improvements this year have included an investor survey, led by a
third party, on HICL's sustainability approach. HICL received an
average rating of 7.8 out of 10 for its ESG disclosures and 7.6 out
of 10 for its ESG metrics and targets. The survey also provided
valuable perspectives on the evolving landscape of ESG reporting
frameworks, and the metrics most commonly used by investors. This
information will enable the Company to continue to meet
sustainability reporting expectations and offer accountability to
investors.
Further information on this shareholder survey,
as well as an in-depth review of HICL'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, the highlights of which
are on page 36 of the full Annual Report linked above.
Capital allocation
The Board maintains a strong focus on capital
allocation. This was evidenced during the year by the acceleration
of HICL's strategic asset disposal programme, the prioritisation of
reducing RCF drawings, the announcement of a share buyback
programme and the execution of highly selective accretive
investments.
Going forward, the Board will continue to apply
a highly-disciplined approach to capital allocation, with a
suitably high bar for new acquisitions, guided by the relative
attraction of further share buybacks.
Outlook
The Board and Investment Manager's disciplined
approach to balance sheet management has provided a platform from
which HICL can execute its strategy with flexibility and enhanced
financial firepower.
The growth potential in the infrastructure
sector, particularly in those areas that support the modern
economy, is considered vast. Alongside HICL's resilient
concession-based portfolio, more recent growth-oriented investments
enhance the Company's long-term earnings drivers and provide
greater potential for outperformance through active management. I
invite you to look at the increased disclosure on the key growth
drivers for these assets which are included in the Top 10 assets
section starting on page 26 of the full Annual Report linked
above.
Driven by the Manager's proven ability to
consistently realise investments at attractive valuations, the
Company expects to continue to progress strategic and accretive
asset rotation. Prevailing market dislocation is anticipated to
provide opportunities to further enhance portfolio construction and
generate shareholder value through selective investments, without
recourse to equity markets.
HICL's diversified portfolio of over 100
high-quality, inflation-linked assets reflects the evolution of the
core infrastructure market - offering shareholders attractive
risk-adjusted value for today, with exposure to the powerful
infrastructure megatrends driving the returns of
tomorrow.
Mike
Bane, Chair
21 May 2024
1.
HICL Infrastructure PLC and its subsidiaries is
defined as either HICL or the Group throughout the
Report
2.
HICL Infrastructure PLC, the Company only, is
defined as the Company throughout the Report
3.
Based on discount rate, less Ongoing Charges
Ratio, adjusted to reflect the share price discount to the NAV
using published discount rate sensitivities
4.
Based on interim dividends paid plus change in NAV
per share in the year
5.
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
HICL has performed well
operationally in the year, with the portfolio well insulated
from rising interest rates and benefitting from strong inflation
correlation. This solid foundation was supported by the
enhancement of the Group's balance sheet and the continued
strategic evolution of the portfolio during the year.
These achievements were underpinned by the
acceleration of the Group's asset rotation strategy, resulting in
over £700m of transactions, including over £500m of accretive
disposals and complemented with highly targeted acquisitions. This
activity improved key portfolio metrics, strengthened HICL's
balance sheet and supported the valuations of the Group's
portfolio.
This active management of the portfolio,
supported by inflation pass-through and real growth in HICL's
demand-based assets, continues to bolster actual and expected
growth in distributable cash, enabling the recommencement of
sustainable dividend growth from FY26.
With a robust balance sheet, keen investment
discipline and a rapidly growing addressable market, HICL is in a
strong position to deliver value for shareholders through both
income and capital growth over the long term.
Operational Highlights
The underlying return from the portfolio was
solid for the year ended 31 March 2024, delivering an underlying
return of 9.0% (10.2% at 31 March 2023), ahead of the expected
return of 7.2% for the year (as at 31 March 2023) before the impact
of changes to reference discount rates and macroeconomic
assumptions.
This portfolio outperformance was primarily
driven by accretive transaction activity and value enhancement at
the asset level, partially offset by lower than forecast inflation
in the second half of the year and increased lifecycle costs in the
UK PPP sector.
Further details can be found in the Valuation
section of this report starting on page 46 of the
full Annual Report linked above.
Operational performance overview
HICL's diversified portfolio of high-quality
core infrastructure assets performed in line with the Investment
Manager's expectations over the year.
The Group's more recently acquired modern
economy assets - Fortysouth, Texas Nevada Transmission ("TNT"),
Hornsea II OFTO and Altitude Infra - are now fully integrated into
the portfolio and are performing broadly in line with their
respective business plans.
Affinity Water submitted its business plan to
Ofwat in September 2023 as part of the 2024 periodic price review
("PR24") and is due to receive a draft determination over the
summer months. As a water only company, Affinity Water has no
direct exposure to sewerage services. Financially, Affinity Water
goes into PR24 with a robust capital structure, owing to proactive
balance sheet management. This has enabled the company to submit a
business plan which envisages 32% growth in its regulatory capital
value over the next regulatory period of five years, whilst
maintaining the lowest bill increases in the sector. Importantly,
Affinity Water continues to be well placed to resume shareholder
distributions in FY26, further supporting the Group's cash
generation and dividend cover forecast.
High Speed 1 ("HS1") recommenced shareholder
distributions in the year, driven by the continuing recovery in
international train travel following the Covid-19 pandemic. During
the second half of the year, three potential new operators
announced their intention to utilise HS1 from 2026 to provide
competing services to a variety of European
destinations.
The possibility of additional international
operators was a key attraction of the investment at the time of
acquisition; and InfraRed will continue to work closely with the
HS1 management team to support greater utilisation of the line. The
introduction of one or more new international operators would be
expected to result in an increase in revenues, benefitting HS1's
valuation.
Enhanced disclosure on the operational
performance of each of HICL's Top 10 assets is set out
starting on page 26 of the full Annual Report linked
above.
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.
Investment activity
Consistently improving portfolio composition
through accretive asset rotation has been a core part of the
differentiated approach since IPO. In that time, the Investment
Manager has made over £1bn of strategic asset disposals. This gives
HICL a more extensive track record of asset rotation than any of
its core infrastructure peers.
In the year, HICL's focus was on disposal
activity, which enabled accretive rotation into highly attractive
new assets, alongside repayment of the Group's RCF and the
announcement of a £50m share buyback programme.
£509m of asset disposals were made during the
year, with all realisations made either at or above carrying value.
This first-hand transaction experience reinforces the Investment
Manager's view that HICL's portfolio remains fundamentally
undervalued by public markets given that high-quality,
inflation-linked core infrastructure assets continue to attract
strong valuations in private markets. Disposals announced during
the year:
- A portfolio
sale comprising four UK PPP projects, namely; Queens (Romford)
Hospital, Oxford John Radcliffe Hospital, Priority Schools North
East Batch and South Ayrshire Schools, in addition to half of the
Group's investment in the Hornsea II OFTO, for an aggregate
c.£204m, at a modest premium to their combined carrying
value;
- Northwest
Parkway (US) a partial disposal of a toll-road in Colorado for
$86m, in line with its carrying value;
- Bradford BSF
Phase 1 & 2 (UK), the combined sale of two PPP schools for
c.£37m at an 8% premium to its carrying value;
- University of
Sheffield Accommodation (UK), the sale of a concession with
demand-based revenues for £18m, in line with its carrying value;
and
- Northwest
Parkway (US), the disposal of HICL's remaining stake in the
project, with the net proceeds of $232m representing a 30% premium
to its carrying value. In combination with the partial disposal
completed earlier in the year, the sale of Northwest Parkway
crystallised a 13.0% holding period IRR and 2.2x multiple on
invested capital since HICL's initial investment in December
2016.
HICL also signed and completed three targeted
investments in the year totalling £227m:
- Altitude Infra
(France), the largest independent wholesale fibre network in rural
France (3% of the Directors' Valuation);
- Hornsea II OFTO
(UK), the offshore transmission assets associated with the world's
largest installed windfarm (2% of the Directors' Valuation);
and
- An incremental
investment in A63 Motorway (France), a high-performing toll road
the Investment Manager knows well, having initially developed the
asset through another InfraRed-managed fund (now 7.9% of the
Directors' Valuation).
In combination, the significant transaction
activity completed during the year improved the portfolio's yield
profile, and was a contributing factor to the Board's decision to
guide a return to dividend growth for the Company for the year
ending 31 March 2026. This demonstrates the value that can be
generated for shareholders through active asset
management.
Buyback programme
In March 2024 the Company announced a £50m
share buyback programme. The Investment Manager believes that
buying back HICL's shares when the share price is at a significant
discount to NAV has economic merit, serves as a sign of confidence
in the Company, and illustrates the range of levers available to
the Board and Manager to enhance shareholder value.
The risk and return proposition available to
the Company through buying back its shares will continue to be a
key benchmark for future capital allocation decisions.
Specialist asset management
The consistent delivery of investment
performance throughout the entire investment lifecycle is only
possible through InfraRed's dedicated team of over 30 specialist
asset managers, situated across London, New York and Sydney and
supported by specialist operating partners in certain sectors and
markets. This asset management capability continues to evolve with
the investment activities across InfraRed's wider platform,
spanning both core and value-add strategies.
Since HICL's IPO, the Investment Manager has
successfully delivered 18 construction assets, generating over 5.0p
of NAV outperformance. This specialisation was demonstrated again
in the year at Blankenburg Tunnel, where final major construction
milestones were achieved. InfraRed's strong track record in
greenfield, construction stage investments, positions HICL to
pursue suitable opportunities in the space as and when they
arise.
As long-standing responsible investors in
critical infrastructure, InfraRed's active asset management
approach is predicated on maintaining appropriate quality, safety
and service levels for HICL's clients and end-users. In cases where
remediation works are required to address construction-related
defects, InfraRed is overseeing delivery of appropriate capital
works programmes alongside responsible construction contractors,
where relevant. In these cases, it is only by working proactively
with our partners to ensure continuity of service for the
community, that shareholder value can be protected.
Additional information on asset management
initiatives which help to preserve and enhance value across HICL's
largest investments is set out starting on page 26 of
the full Annual Report linked above.
Financial highlights
HICL's NAV per share decreased by 6.7p over the
year to 158.2p at 31 March 2024 (31 March 2023: 164.9p). This
reflected an increase in the portfolio's weighted average discount
rate from 7.2% to 8.0%, partially offset by higher forecast
inflation, higher interest on cash deposits, and positive
underlying portfolio performance. Further detail on the approach to
valuation can be found in the Valuation section starting on page
46 of the full Annual Report linked
above.
The Group issued long-term debt in the year via
a £150m Private Placement, diversifying HICL's capital base. The
instrument, with 10- and 12-year maturities and an all-in effective
interest rate of 5.75%, was sought to responsibly manage a portion
of the Group's floating rate exposure at a lower long-term rate,
manage the refinancing risk and strategically align the term
repayment with expected capital redemptions from the PPP
portfolio.
Proceeds from the disposals announced in the
year have enabled the Group's RCF to be substantially repaid
post-year end, down from £494m at its peak in April 2023, reducing
HICL's pro-forma fund borrowing ratio to 7% (31 March 2024:
16%).
Following the completion of the Northwest
Parkway sale, the Group's RCF was reduced from £650m to £400m,
recognising that its requirements had reduced in this higher
interest rate environment. The RCF's expiry date remains 30 June
2026.
Further information on HICL's financial
performance can be found in the Financial Review section starting
on page 40 of the full Annual Report linked
above.
Governance
As part of the Investment Manager's succession
plan, Jack Paris officially took over from Werner von Guionneau as
InfraRed CEO in July 2023. At the HICL Investment Committee level,
Jack replaced Werner, with Chris Gill taking over as Chair of the
Committee.
Sustainability
Sustainability is embedded throughout HICL's
business model, focused on four key areas where HICL's investments
can generate the strongest outcomes: Environment, Communities,
People and Governance. InfraRed recognises that providing HICL's
shareholders with sustainable, long-term income is intrinsically
linked to the delivery of favourable outcomes, across these four
pillars, to the communities served by its assets.
HICL has now released its second 'live' year of
emissions data, which covers 100% of the portfolio and serves to
benchmark progress towards the Group's goal of achieving a
carbon-neutral portfolio by 20501. InfraRed has
developed an action plan which envisages the proportion of HICL's
investments anticipated to be aligning, aligned to or at net zero
increasing from 25% today to 45% in 2027.
Beyond the portfolio's inherent social
contribution through the delivery of essential services, HICL's
assets are a source of direct employment for over 2,300 individuals
and indirectly support thousands more through the supply chain. To
further integrate a sustainability-first mindset into this supply
chain, InfraRed has introduced diversity, equity, and inclusion
guidelines across portfolio companies, with compliance monitored
via the annual ESG survey. In a move towards greater
accountability, key Group service providers are now also asked to
endorse a code of conduct in addition to self-assessments, enabling
more formal oversight of adherence to policies and
standards.
Sustainability highlights are provided on pages
36 to 39 of the full Annual Report linked
above. Full details are set out in the Company's 2024
Sustainability Report, available on the HICL website.
Risk management
HICL's risk appetite statement, approach to
risk management and governance structure are set out in Risk and
Risk Management, starting on page 53 of the full
Annual Report linked above.
Commentary relating to the Group's key risks is
set out below.
Political and regulatory risk
Geopolitics
Geopolitical risk remained elevated, noting the
continued unrest in Ukraine and the Middle-East. The Company's
portfolio is not directly exposed to these regions. Secondary
impacts, including supply chain disruption and inflation, have had
a limited impact on a subset of projects during the period, with
risks to equity mitigated through contractual pass-through
mechanisms.
UK
elections
National elections will take place in the UK
during the coming financial year, with the inherent potential to
shift the policy framework around infrastructure ownership,
handback and future procurement.
InfraRed observes broad political consensus on
the significant levels of investment needed to upgrade the UK's
ageing or outdated infrastructure. This bipartisan support,
combined with stretched public sector balance sheets, is expected
to provide a framework for constructive discussions between the
public and private sectors on the important role that private
capital can continue to play in delivering much-needed critical
public infrastructure. InfraRed actively contributes to this
discussion through its various industry and trade organisation
memberships and through direct engagement with both major political
parties.
Regulatory
determinations
HICL's primary exposure to regulatory risk is
through Affinity Water, which expects to receive its PR24 draft
determination in June 2024. Recognising that there is uncertainty
around the outcome of PR24, InfraRed has collaborated closely with
the Affinity Water management team and Ofwat throughout the process
and is confident that HICL's valuation of the asset reasonably
weighs the risks and opportunities associated with the price
review. The Investment Manager also notes the heightened political
and regulatory scrutiny of the water sector more broadly, including
reports of financial issues affecting certain water and sewerage
companies. Affinity Water benefits from a stable capital structure
with very little holdco debt, no refinancing requirement until
AMP8 (which starts 1 April 2025), and no exposure to sewerage
services.
More broadly, InfraRed mitigates this risk by
managing regulatory exposures across jurisdictions and regulators.
TNT and Altitude Infra both benefit from stable regulatory
frameworks which differ considerably from the UK's incentive-based
framework.
PFI
handback
The acceleration of PPP projects returning to
public control is increasingly a key issue for both public and
private sectors. InfraRed is a key voice on this issue, actively
contributing to the Infrastructure and Projects Authority's (IPA)
industry working group focused on this transition, as well as its
industry steering group. InfraRed has initiated a systematic
programme to review its preparedness for all future project
handbacks within HICL's portfolio. HICL has 33 projects scheduled
for transfer within the next ten years, which account for 13% of
the Directors' Valuation at 31 March 2024. This preparatory work,
supported by a specialist third-party adviser, is shaping
InfraRed's strategic planning and asset management approach to
effectively mitigate this transition risk.
The proactive management of lifecycle spending
is an important factor as projects approach handback. PPP projects
make up 58% of HICL's portfolio, and lifecycle risk and reward is
borne by the project on 59% of these assets. In these cases,
InfraRed continues to closely monitor the appropriateness of the
lifecycle forecast reflected in each asset's valuation. For the
remaining 41% of the PPP portfolio, lifecycle risk is passed down
to the facilities management contractor, which is an important part
of InfraRed's risk management strategy in relation to
handback.
Client
relationships
Long-term partnership frameworks inherently
carry certain risks, which are heightened by the broader
operational and financial challenges facing the UK public sector.
In certain sectors, such as healthcare, this pressure can translate
into behaviour by specific clients, and their advisers, that could
prove adverse to the interests of the PFI, including with respect
to service delivery. While these isolated instances have not had a
material impact on the overall portfolio to date, these practices
increase the risk of dispute, and in extreme cases could lead to
reduced or non-payment of contracted revenues, presenting a risk to
the Group's cash flow stability.
Macroeconomic risk
The macroeconomic climate continues to weigh on
listed market valuations for real assets, including for HICL.
Notwithstanding, InfraRed remains confident in the valuation of the
portfolio, and has demonstrated the validity of HICL's NAV through
multiple disposals in the year across sectors and
geographies.
The persistence of the high interest rate
environment is likely to limit HICL's opportunities to raise new
equity capital in the near future. However, acquisition and
disposal activity undertaken during the year has clearly
demonstrated InfraRed's ability to progress HICL's strategic
objectives without reliance on equity capital markets. If equity
markets remain inaccessible for a protracted period, the Investment
Manager is confident in its ability to continue to rotate assets to
enhance HICL's portfolio and investment proposition.
If inflation continues to fall faster than the
Group's projections, there is the risk of downward pressure on cash
generation and dividend cover. However, HICL's valuation forecasts
remain conservative relative to long-term market expectations, and
the impact of short-term variations in inflation on dividend cover
is not expected to be material. As part of the process undertaken
to recommend a return to dividend growth, the proposed dividend
increase has undergone rigorous stress testing against various
macroeconomic scenarios, including a rapid return to a low
inflation environment.
Market and outlook
HICL has continued to prove its resilience in
an uncertain macro environment, underpinned by carefully considered
portfolio construction, robust balance sheet management and
disciplined transaction activity. Active management during the year
has provided HICL with the financial strength and flexibility to
continue to execute its strategy and deliver an attractive
investment proposition for HICL shareholders over the long
term.
InfraRed continues to observe attractive
opportunities for HICL to pursue. Conditions across the market for
infrastructure assets remain variable and favour experienced
investors with deep networks and flexible balance sheets, such as
HICL. These attributes enable the Group to identify special
situations with favourable competitive dynamics and with outsized
returns. In this way, the Group's approach remains highly selective
within its core sectors (see the Infrastructure Market section on
pages 10-13 of the full Annual Report linked
above).
The marginal return threshold for assessing new
investments remains high, with the benchmark for new opportunities
informed by potential NAV accretion available through additional
share repurchases, as well as the contribution to HICL's key
portfolio metrics. Funding for such investments will continue to be
supported by selective disposals, as appropriate, and where these
divestments align with long-term portfolio composition
objectives.
HICL's portfolio has been structured to perform
in a variety of macroeconomic environments; it has resilient
inflation-linked cash flows, largely insulated from higher interest
rates and with long-term growth potential. These attributes
underpin the Group's long-term earnings base and ensure HICL is
well positioned to generate shareholder value through both
sustainable income and long-term capital growth.
1.
HICL outlines in detail its transition plan and
targets towards a carbon neutral and, therefore, net zero portfolio
by 2050 on pages 15 to 19 of its 2024 Sustainability
Report
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.
By order of the Board authorised
signatory:
Aztec Financial Services (UK)
Limited
Company Secretary
21 May 2024
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/AnnualReport2024