TIDMHICL
RNS Number : 4093N
HICL Infrastructure PLC
20 May 2020
HICL Infrastructure PLC 20 May 2020
ANNUAL RESULTS FOR THE YEARED 31 MARCH 2020
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 2020. The Annual Report and Accounts are available at the
following link: www.hicl.com/AnnualReport2020
The entire investment business of HICL Infrastructure PLC (the
"Company") was transferred from HICL Infrastructure Company Limited
("HICL Guernsey") to the Company on 1 April 2019, by way of a
scheme of arrangement as detailed in the Prospectus dated 4 March
2019. To enable an improved assessment of the Company's investment
business, comparative data (for the year to 31 March 2019, and as
at 31 March 2019) relates to HICL Guernsey, being the owner of
HICL's investment business until 1 April 2019. All financial
information from 1 April 2019 relates to the Company. Throughout
"HICL" means HICL Infrastructure Company Limited up to and
including 31 March 2019 and HICL Infrastructure PLC from 1 April
2019.
Highlights
For the year ended 31 March 2020
-- The target dividend of 8.25p per share for the year ended 31
March 2020 has been declared and is fully cash covered.
-- Solid underlying portfolio performance(1) was offset by a
combination of external factors: the exceptional impact of Covid-19
on HICL's demand-based assets; and changes to macro-economic
assumptions.
-- Despite a decline in NAV per share of 5.2p (3.3%) to 152.3p
per share (2019: 157.5p), NAV total return(2) was positive at 1.9%
(2019:10.8%), reflecting the underlying strength of HICL's
diversified portfolio.
-- The Directors' valuation(3) of the portfolio on an Investment
Basis(4) at 31 March 2020 is GBP2,888.5m (2019: GBP2,998.9m), and
GBP2,837.9m (2019: GBP4,821.2m(5) ) on an IFRS Basis.
-- In light of the impact of Covid-19, the Board has revised the
target dividend guidance for the year ending 31 March 2021 to 8.25p
per share(6) , maintaining the level of dividend paid in the year
to 31 March 2020. The Board will revisit guidance for the year
ending 31 March 2022 when the timing and extent of economic
recovery becomes clearer.
-- Operationally, portfolio companies are responding well to
Covid-19 challenges and supporting the public sector to keep
essential infrastructure running smoothly, particularly within
HICL's healthcare PPP portfolio.
-- A number of the key political and regulatory headwinds in the
UK have alleviated, following the general election and the
completion of the water sector's price review.
-- During the year, HICL strengthened an already robust balance
sheet, raising GBP117m in two capital raises and successfully
refinancing the RCF(7) , with GBP321m of available drawings under
the facility.
-- The Board and InfraRed are committed to evolving
sustainability disclosures as part of the Company's commitment to
best in class governance, including voluntary adoption of TCFD(8)
reporting on carbon-emissions.
-- InfraRed has continued to develop an attractive pipeline of
accretive investment opportunities for HICL, and will act
selectively on these, as well as continuing to evaluate strategic
disposals.
1. Underlying portfolio performance includes the reduction in
the valuation of Affinity Water taken at September 2019
2. NAV per share change plus dividends paid
3. As supported by a third-party valuation expert engaged by the Board
4. Pro forma summary financial information on the basis that the
Company consolidates the results of the Corporate Subsidiaries
5. HICL Guernsey's GBP2,000.1m investment in the Company at 31
March 2019 was eliminated through the Scheme on 1 April 2019,
alongside settlement of HICL Guernsey's GBP2,000.1m investment
obligation to the Company, which was included in Working
capital
6. This is a target only and not a profit forecast. There can be
no assurance that this target will be met
7. Revolving Credit Facility
8. Task force for Climate-related Financial Disclosures
Summary Financial Results
(on an Investment Basis)
for the year to 31 March 2020(9) 31 March 2019(12)
Income(10) GBP86.7m GBP324.1m
Profit before tax ("PBT")(11) GBP50.0m GBP285.7m
Earnings per share ("EPS") 2.7p 15.9p
Target dividend per share for
the year 8.25p 8.05p
9. Discount rate reductions, Carillion writeback and changes in
economic assumptions in the prior year not replicated in the current
year, combined with adverse impact from Covid-19 and regulatory
headwinds resulted in lower Income, PBT and EPS. See Section 3.3
- Financial Review in the Company's Annual Report for further details
10. Income was GBP51.6m on an IFRS Basis (2019: GBP290.4m)
11. PBT was GBP49.5m on an IFRS Basis (2019: GBP285.4m)
Net Asset Values 31 March 2020 31 March 2019(12)
Net Asset Value ("NAV") per share 152.3p 157.5p
Q4 Dividend 2.07p 2.02p
NAV per share after deducting
Q4 dividend 150.2p 155.5p
12. Comparative data in the tables above (for the year to 31 March
2019, and as at 31 March 2019) relates to HICL Infrastructure Company
Limited, being the owner of HICL's investment business until 1
April 2019
Ian Russell, Chairman of the Board, said:
"At this time, our priority is keeping our infrastructure
available to support critical services and ensuring that those who
are responsible for maintaining it are safe. Through InfraRed, our
Investment Manager, the Board has sought to ensure that every
effort is being made to support the effective running of the
portfolio, and particularly to support the healthcare sector, in
which we are responsible for maintaining 25 hospital facilities
with over 9,000 beds.
"We also recognise that as well as being a public health
emergency, the Covid-19 pandemic is resulting in financial
difficulties for individuals and families. HICL provides income to
many, predominantly UK, private investors and pensioners. The Board
is pleased that the Company's performance has enabled us to meet
our dividend target for 2020.
"In light of the exceptional circumstances brought by the
Covid-19 pandemic, at the current time the Board believes it would
not be appropriate to increase the dividend in 2021. The Directors
have therefore taken the decision to target a dividend of 8.25p per
share for the year ending 31 March 2021, matching the dividend paid
for the financial year just ended, and will revisit dividend
guidance for the year ending 31 March 2022 when the timing and
extent of economic recovery becomes clearer.
"The Company, supported by its Investment Manager, is committed
to its vision of being a pre-eminent core infrastructure investor,
seeking out new and sustainable investment opportunities in
essential infrastructure, with good quality, predictable cash flows
and a protected market position."
Harry Seekings, Co-Head of Infrastructure at InfraRed Capital
Partners Limited, HICL's Investment Manager added:
"A challenging and unprecedented market context during the final
weeks of the financial year impacted on steady progress made over
the preceding 11 months. Against this backdrop the Company has
delivered a solid set of results. In addition, the Company has also
strengthened its balance sheet this year, by refinancing its
RCF(13) and completing GBP117m of equity capital raisings.
"InfraRed is focused on active management of HICL's portfolio to
mitigate the impact of Covid-19. This is particularly the case for
healthcare PPPs where we are working in partnership with both
clients and subcontractors to ensure continued service delivery.
The Investment Manager is also closely monitoring the impact of
easing lockdowns on demand-based assets in the portfolio.
"Over the long term, we believe that sustainable yield from core
infrastructure will continue to appeal to institutional investors,
especially in a low interest rate environment. Modernising global
infrastructure will require significant investment over the coming
years, and we are continuing to develop and review an attractive
pipeline of core infrastructure assets for HICL."
13. Revolving Credit Facility
Enquiries
InfraRed Capital Partners Limited +44 (0) 20 7484 1800 / info@hicl.com
Harry Seekings
Keith Pickard
Kirsty MacCallum
Teneo +44 (0) 7342 031 051 / HICL@teneo.com
George Hutchison
Haya Herbert-Burns
Investec Bank plc +44 (0) 20 7597 4952
David Yovichic
RBC Capital Markets +44 (0) 20 7653 4000
Darrell Uden
Aztec Financial Services (UK) Limited +44 (0) 20 3818 0246
Chris Copperwaite
Sarah Felmingham
Chairman's Statement
At this time, our priority is keeping our infrastructure
available to support critical services and ensuring that those who
are responsible for maintaining it are safe. Through InfraRed, our
Investment Manager, the Board has sought to ensure that every
effort is being made to support the effective running of the
portfolio, and particularly to support the healthcare sector, in
which we are responsible for maintaining 25 hospital facilities
with over 9,000 beds.
We also recognise that as well as being a public health
emergency, the Covid-19 pandemic is resulting in financial
difficulties for individuals and families. HICL provides income to
many, predominantly UK, private investors and pensioners. The Board
is therefore pleased that our performance has enabled us to meet
our dividend target.
Total Shareholder Return(1) over the year has been marginally
positive, despite a decline in Net Asset Value ("NAV") (see
Financial Highlights below). Successful tap issuance was undertaken
in the second half of the year, raising GBP117m, and
value-accretive investment activity saw both attractive
acquisitions and strategic disposals of selected assets, improving
key portfolio metrics.
Delivering sustainable income
Providing well-maintained core infrastructure for communities,
which generates sustainable income for shareholders over the long
term, is fundamental to HICL's investment proposition.
This investment proposition is predicated on strong and
collaborative partnerships with clients and subcontractors. The
quality and efficacy of these relationships, which were a key theme
of HICL's Capital Markets Event in January 2020, enable the Company
to be a successful steward of core infrastructure assets which
benefit society as a whole - local communities and investors
alike.
Effective stewardship allows HICL to deliver a sustainable
return; a long-term income stream for shareholders generated from
the successful delivery and management of essential infrastructure.
As an investor in infrastructure which sits at the heart of
communities, a sustainable mindset is fundamental to the successful
implementation of HICL's business model by the Investment
Manager.
Sound management of the assets in HICL's portfolio also makes a
positive contribution to everyday lives. An investment in HICL
inherently supports the UN's Sustainable Development Goals ("SDGs),
in particular those in relation to innovation and resilient
infrastructure, and building sustainable communities(2) .
InfraRed's approach to active management ensures that individual
HICL portfolio companies also contribute to several other SDGs.
Financial Performance
The underlying annual return from the portfolio was 7.1%
(including the value reduction taken on Affinity Water in September
2019). This was offset by a combination of external factors, being
the exceptional impact of Covid-19 on HICL's demand-based assets; a
reversal of planned decreases in UK corporation tax rates; and
reduced forecast deposit interest rates. Despite the resulting
decline in NAV per share of 3.3%, Total Shareholder Return for the
year to 31 March 2020, on a NAV plus dividends paid basis, was
1.9%. This reflects the underlying strength of HICL's diversified
portfolio and, in the context of the Covid-19 pandemic, represents
a solid performance for the year as a whole.
The Company faced political and regulatory pressures in the
first half, and the disruption Covid-19 has brought to societies
and financial markets towards the Company's year-end. The decisive
outcome of the UK general election in December 2019 eased some of
the political pressure on the infrastructure sector, while the
final determination from Ofwat on Affinity Water's business plan
brought clarity for that investment for the next five years.
The Investment Manager's Report provides further comment on the
impact of Covid-19 on the valuation; and an analysis of the
movements in the Directors' Valuation in the year can be found in
the full Annual Report and Accounts linked above (Section 3.4 -
Valuation of the Portfolio).
The Company's balance sheet is healthy and, with no cash
drawings on HICL's GBP400m revolving credit facility(3) at the time
of writing, has a strong liquidity position.
Dividend
Cash flow for the year was in line with expectations although,
due to the Covid-19 crisis, the Company has prudently retained some
cash at portfolio company level at the year-end to provide
additional resilience. The full-year dividend of 8.25p per share
declared was cash covered 1.14 times(4) .
It is testament to the Company's long-standing ambition
regarding the delivery of sustainable income that, by the end of
September 2020, we expect that IPO investors will have received
their initial capital back, in full, through the dividend
alone.
Dividend guidance
At the time of the November 2019 Interim Results, the Board
published guidance for HICL's dividends for the next two years,
targeting 8.45p per share for year ending 31 March 2021, and 8.65p
per share for year ending 31 March 2022. This guidance was
reaffirmed in the Company's Interim Update Statement of 28 February
2020. Since then, the Covid-19 pandemic has created an
unprecedented level of disruption for the global economy. The Board
has been particularly mindful of the impact on the Company's
demand-based assets and the implications this might have for HICL's
ability to pay fully cash-covered dividends.
As was explained on the investor call on 23 March 2020, the
Board and the Investment Manager have therefore kept the published
dividend guidance under review.
The delivery of a long-term and sustainable dividend is a
priority for the Board. While HICL has built a diversified
portfolio, capable of withstanding many of the more predictable
challenges which exposure to the infrastructure asset class brings
in the normal course of events, the current circumstances are far
from normal. The valuation of, and cash flow forecasts for, the
demand-based assets at 31 March 2020 include an estimate of the
duration and severity of the economic impact of the pandemic. In
light of these exceptional circumstances, at the current time the
Board believes it would not be appropriate to increase the
dividend. The Directors have therefore taken the decision to target
a dividend of 8.25p per share for the year ending 31 March 2021,
matching the dividend paid for the financial year just ended, and
will revisit dividend guidance for the year ending 31 March 2022
when the timing and extent of economic recovery becomes
clearer.
The Board and the Investment Manager will continue to monitor
the Company's investments in demand-based assets closely. These
assets are all strategically important to regional economies and
therefore well-positioned to benefit from a resumption of economic
activity.
Capital Raising
Prior to the emergence of Covid-19, the Company had negotiated a
number of political and regulatory challenges over the previous 12
months. The return to a more predictable operating environment at
the calendar year-end led to a rise in investor demand for HICL
equity. Thus, we are pleased that the Company raised GBP117m from
equity markets in December 2019 and January 2020 to strengthen our
balance sheet and to underpin the acquisition strategy. The Board
thanks shareholders for their continued support.
Corporate Governance
Board composition
A strong focus on best-in-class corporate governance by the
Board supports the success of HICL's business model. Our Directors
have a broad range of expertise, which enables effective oversight
of HICL and constructive challenge of our Investment Manager.
Board recruitment and succession planning is a key governance
priority. I would like to extend a warm welcome to Rita Akushie,
who was appointed as a Non-Executive Director in January 2020. Rita
is a qualified accountant with public sector experience and is CFO
of Cancer Research UK.
The Nomination Committee is proud of the diversity of thought
and professional experience within the Board, the composition of
which now meets the requirements of both the Hampton-Alexander
Review and the Parker Review.
Environmental impact and reporting
We are pleased that through the Investment Manager, HICL has
systematically incorporated climate change opportunity and risk
assessment into the investment process. It is vital that long-term
risks and opportunities associated with the physical and
transitional impact of climate change inform HICL's strategy.
InfraRed's thinking in this regard has enabled the Company to
voluntarily adopt the Taskforce for Climate-related Financial
Disclosures ("TCFD") guidance, which includes new carbon-emissions
disclosures. Keeping track of emissions and identifying measurement
tools is one step in an ongoing process to reduce HICL's
environmental impact.
Business model in action
The three pillars of HICL's business model: Value Preservation,
Value Enhancement, and Accretive Investment are interdependent,
working together to enable the long-term provision of essential
infrastructure for society and, in doing so, protect and enhance
the value in the portfolio for shareholders.
Value preservation and enhancement
The Company's strategy is not only to preserve value in the
portfolio but also to deliver outperformance, both in terms of
financial performance, and also through working in partnership with
clients and sub-contractors to enhance the public's experience of
infrastructure. We are firm in the belief that this is inextricably
linked to shareholder value over the long term.
In the year, PPP contract variations have delivered enhanced
asset outcomes for clients and created value for HICL's
shareholders There have also been variations completed at UK
hospital projects, supporting the public sector through the
Covid-19 crisis by repurposing space across HICL's health estate.
The Infrastructure and Projects Authority noted in its recent
guidance(5) that PFI contracts deliver vital public services. As an
investor, HICL is committed to proactively supporting and
contributing to the public sector response to the Covid-19 crisis
overall.
Accretive investment
Investment discipline remains fundamental to the Company's
acquisition strategy. InfraRed seeks to grow HICL's portfolio only
when investment opportunities meet key core infrastructure
parameters, improve important portfolio metrics, and deliver a
sustainable return. Strategic disposals are also considered where
these enhance NAV and portfolio construction.
For example, the Investment Manager has undertaken on behalf of
HICL the acquisition of two investments in offshore transmission
assets ("OFTOs") in the year. These investments enhance HICL's
diversification whilst supporting the UK's transition to a low
carbon economy by facilitating the transmission of enough renewable
energy to power over 850,000 UK homes. The Company is part of the
consortium named as preferred bidder on the Walney Extension OFTO,
which is due to close later in 2020.
Also during the year, the Investment Manager completed the
disposal of investments in two PPP projects. These generated
material value for the Group and improved the important portfolio
metrics of total return, yield, inflation linkage and asset
life.
Outlook
The Company, supported by its Investment Manager, is committed
to its vision of being a pre-eminent core infrastructure investor,
seeking out new and sustainable investment opportunities in
essential infrastructure, with good quality, predictable cash flows
and a protected market position.
At the time of writing, the broader market environment is
characterised by significant uncertainty and volatility, and in
this context the defensive attributes of HICL's portfolio stand the
Company in good stead. Market disruption also brings opportunity
for those companies resilient and agile enough to move quickly and
decisively.
In the near term, as we navigate through the ongoing impacts of
the Covid-19 pandemic, active management and monitoring of the
portfolio is the key priority. InfraRed, through its Asset
Management team, is staying close to HICL's stakeholders,
supporting our partners, and working at all times to keep essential
public assets available for their communities.
Ian Russell, Chairman
19 May 2020
1. On a Net Asset Value ("NAV") plus dividends paid basis
2. Sustainable Development Goals 9. Industry, Innovation and
Infrastructure and 11. Sustainable Cities and Communities
3. Drawings of GBP79m for letters of credit
4. Including profits on disposals of GBP16.4m. Excluding this,
dividend cash cover would have been 1.03x
5.
https://www.gov.uk/government/publications/supporting-vital-service-provision-in-pfipf2-contracts-during-the-covid-19-emergency
Investment Manager's Report
The Investment Manager
InfraRed Capital Partners Limited ("InfraRed") acts as the
Investment Manager to HICL, and Operator of the Group's investment
portfolio. InfraRed is appointed as HICL's Alternative Investment
Fund Manager ("AIFM"), under the Alternative Investment Fund
Manager Directive ("AIFMD").
As Investment Manager to HICL, InfraRed has day-to-day
responsibility for the Company and interfaces with HICL's key
stakeholders. Our activities include:
-- Development and execution of HICL's strategy;
-- Stewarding the assets in the portfolio, through proactive
asset and portfolio management, including critical issue
management;
-- Investment origination, due diligence and execution; and
-- Capital raising, investor relations and preparation of key external communications.
InfraRed is an international investment manager:
-- Headquartered in London with offices in Hong Kong, Mexico City, New York, Seoul and Sydney;
-- 20+ year track record of successful investment in infrastructure in over 200 assets;
-- c. 90 infrastructure professionals with requisite technical,
operational and investment expertise; and
-- Authorised and regulated by the Financial Conduct Authority.
In December 2019, InfraRed announced an agreement whereby Sun
Life Financial Inc. (together with its subsidiaries and joint
ventures, "Sun Life") will purchase a majority stake in InfraRed.
The transaction is expected to close during the first half of 2020.
The Sun Life acquisition will provide further support to InfraRed
in its role as Investment Manager to HICL over the coming years.
For more information please visit www.sunlife.com.
Sustainable Approach
As Operator of the Group's portfolio, InfraRed's Asset
Management and Portfolio Management teams are responsible for
preserving and enhancing value for all stakeholders including
shareholders.
In our role as custodians of critical infrastructure, we take
our responsibilities to HICL's stakeholders seriously. HICL's
success is intrinsically linked to our responsible management of
key public assets and we work hard to build and maintain trusting
partnerships between the public and private sectors.
InfraRed has been, since 2011, a signatory of the Principles for
Responsible Investment ("PRI") and is represented on the
Infrastructure Advisory Committee of PRI. The infrastructure
business line achieved an A+ rating, the highest attainable, for
the fifth successive year in our 2019 PRI assessment. InfraRed's
PRI Assessment report can be found on InfraRed's website:
https://www.ircp.com/PRIAssessment2019
Summary of the year
Underlying portfolio performance was solid in the year, with an
annual return of 7.1% (including a value reduction taken on
Affinity Water in September 2019). However, this was offset by a
combination of external factors: the exceptional impact of Covid-19
on demand-based assets (see below), a reversal of planned decreases
in UK corporation tax rates and reduced forecast deposit interest
rates. Net Asset Value ("NAV") per share has consequently decreased
by 5.2p to 152.3p at 31 March 2020 (2019: 157.5p).
The effects of systemic lockdowns continue to significantly
impact usage of HICL's GDP-linked demand-based assets. However,
these assets are strategically important to their respective
regions and well-positioned to benefit from the resumption of
economic activity. A case study on these assets is set out in the
full Annual Report and Accounts linked above (Section 3.4 -
Valuation of the Portfolio). In the meantime, while economic
uncertainty remains elevated, the Investment Manager supports the
Board's prudent approach to maintain the dividend at the current
level.
Political and regulatory uncertainty, which had been impacting
the UK infrastructure landscape for more than 24 months, has eased
due to the decisive general election result and the conclusion of
the water sector's periodic Price Review in December 2019.
HICL has a strong balance sheet:
-- Strong investor demand for the Company's equity in December
2019 and January 2020 enabled capital raising of GBP117m through
tap issuance which repaid borrowings; and
-- The Revolving Credit Facility was successfully refinanced in
April 2020(1) , and has GBP321m of available drawings.
The attractions of predictable, long-term cash yields from core
infrastructure continue to attract institutional investors in the
current environment.
InfraRed continues to focus on investment discipline, and has
cultivated a strong, well-diversified pipeline for HICL, which it
is actively pursuing.
The Investment Manager continues to prioritise active asset
management of the existing portfolio. Robust business continuity
plans have been implemented across the portfolio to respond to the
challenges raised by the Covid-19 pandemic.
Covid-19
InfraRed has the following key priorities in managing risks
deriving from Covid-19:
-- The well-being of management teams and subcontractor staff
who work in the facilities in HICL's portfolio every day;
-- Keeping essential public assets available for their
communities by ensuring continued delivery of services related to
the maintenance of infrastructure; and
-- Protecting the financial performance of HICL's portfolio.
Operational resilience
Across the portfolio, long-established business continuity plans
have been implemented, with project companies working proactively
with subcontractors and clients, supported by InfraRed's Asset
Management team.
InfraRed's own corporate business continuity plan has been
enacted, and activities relating to its role as Investment Manager
and Operator migrated smoothly to a remote working environment.
All HICL's key service providers have implemented their
continuity plans which are ensuring their operational
effectiveness.
Portfolio Performance
Portfolio companies are supporting the public sector to ensure
assets remain available for use by their communities and best meet
the needs of clients. Examples of this within HICL's healthcare PPP
facilities are the creation of isolation wards from standard wards;
changes to layout to enable separation of patients; and the
establishment of disinfection stations for ambulances.
Long-term, availability-based contracts provide an element of
protection from the economic effects of the pandemic on HICL's
investments in PPP projects; and the regulated assets in HICL's
portfolio have continued to operate without material
disruption.
At the time of writing, the subset of HICL's portfolio where
revenues are driven by GDP-correlated demand (18% of portfolio
value) continues to be impacted by the ongoing, systemic
restrictions on movement ("lockdowns"). The financial structures of
the A63 Motorway (France), Northwest Parkway (USA) and High Speed 1
("HS1") are appropriate for the revenue risk each bears and are
forecast to remain robust while economic activity recovers.
The impact of lockdowns, while significant, should not detract
from the underlying quality of these assets. The A63 Motorway,
Northwest Parkway and HS1 are all strategically important
transportation links that are essential to regional
interconnectivity. We will continue to monitor the performance of
the investments as lockdowns are eased, working closely with the
portfolio company management teams.
Financial Considerations
HICL has a strong liquidity position, with GBP321m of available
drawings on its GBP400m debt facility.
Portfolio companies typically have robust balance sheets, and
all are funded on a non-recourse basis to HICL. Selected
distributions to HICL have been intentionally delayed, leaving cash
in particular portfolio companies to ensure an additional level of
resilience.
The valuation of the Company's investments in demand-based
assets has been affected by the unprecedented impact of Covid-19 on
global economic growth. This has been reflected in forecast cash
flows for these assets; and also through a risk premium applied via
the discount rates used for the valuation.
Revised cash flow forecasts project a continuation of the
current lockdown conditions through to 30 June 2020, with a phased
recovery to normal operating conditions by 1 January 2021. Over a
longer horizon, traffic growth assumptions have been re-cast using
median economic forecasts for GDP. The increased risk premium used
in the valuation of the assets reflects a degree of uncertainty
around the precise trajectory of the eventual economic recovery.
The overall impact of these changes to NAV was GBP72m (4.0p per
share) as at 31 March 2020.
Dividend Guidance
The Investment Manager has worked closely with the Board to
consider forward dividend guidance at a time when the operating
environment is characterised by heightened uncertainty and where
HICL's demand-based asset portfolio is not expected to contribute
yield until there is a recovery in economic activity in 2021. We
concur with the Board's view that it is appropriate for the Board
to maintain the dividend at the current level which is expected to
be substantially cash-covered.
HICL will provide ongoing disclosure during the financial year
on the performance of the demand-based assets against the revised
forecasts and the Board will keep dividend guidance under review as
the macro-economic environment evolves.
Financial Highlights
Net Asset Value ("NAV") per share has decreased by 5.2p to
152.3p at 31 March 2020 (2019: 157.5p). HICL's annualised Total
Shareholder Return, based on change in NAV per share plus dividends
paid, was 1.9% for the year (2019: 10.8%). Solid performance from
the underlying portfolio (including the reduction in the valuation
of Affinity Water taken at September 2019) was offset by a
combination of external factors: the exceptional impact from
Covid-19 on demand-based assets (GBP72.0m / 4.0p per share); and
changes to macroeconomic assumptions, including reduced forecast
interest rates and the reversal of the UK's planned reduction in
corporation tax rates to 17% (GBP58.4m / 3.3p per share).
Cash flow receipts on an Investment Basis were GBP205.9m (2019:
GBP212.8m). After finance and operating costs, net operating cash
flows on an Investment Basis were GBP169.1m (2019: GBP178.9m),
which covered the dividends paid in the year 1.14(2) times (2019:
1.27 times) or 1.03 times (2019: 1.03 times) excluding the impact
of disposals.
Earnings were GBP49.5m for the year to 31 March 2020 (2019:
GBP285.4m). This was principally driven by the same factors as the
decline in NAV above.
HICL uses the Association of Investment Companies' methodology
to assess the ongoing charges percentage, which for the financial
year to 31 March 2020 was 1.11% (2019: 1.08%), which compares well
with other investment companies in the London-listed infrastructure
sector.
Operational highlights
The underlying performance of the portfolio has been solid in
the year, with value enhancements delivering GBP30m of portfolio
return, or 1.6p per share of the NAV(3) .
PPP projects
Public-private partnerships ("PPPs") represented 72% of the
portfolio by value, at 31 March 2020. These are contracts between
the public and private sectors to facilitate the delivery of
essential public infrastructure, such as school and hospital
buildings.
In the year ended 31 March 2020, InfraRed completed HICL's
investment in the Blankenburg Connection, a road tunnel
construction project in the Netherlands. While assets under
construction represent a small part of the portfolio, c. 3% by
value at 31 March 2020, InfraRed believes these types of
investments provide an attractive opportunity for the Investment
Manager to add value, by successfully completing construction and
moving to the operational phase - a key theme of HICL's Capital
Market Event in January 2020.
Demand-based assets
Investments where aspects of the revenue drivers are based on
user demand accounted for 20% of the portfolio by value, as at 31
March 2020. The majority of these have revenues correlated to GDP,
18% at 31 March 2020.
The Company's two toll road investments, the A63 Motorway and
Northwest Parkway performed well in the year, with traffic
outperforming expectations for the first 11 months, ahead of the
onset of the systemic lock-down conditions in March 2020 as a
result of the Covid-19 pandemic. These conditions, which are
persisting at the time this report, have significantly reduced
usage of both toll roads.
HS1 also delivered revenue in line with expectations for the
year, despite the impact of the Covid-19 pandemic during the final
quarter. HS1's contracted bookings for train paths provides
significant mitigation to the short-term impacts of Covid-19 on the
asset, however income from retail units and car parking has
decreased significantly.
In January 2020, HS1 received the Final Determination on its
five-year business plan for Control Period 3 from the Office of
Rail and Road. This final determination was in line with
expectations and, as previously disclosed, there was little impact
on HS1's financial performance, as costs are passed down to the
train operating companies.
Regulated assets
Regulated assets, comprising both the Offshore Transmission
assets ("OFTOs") and HICL's investment in Affinity Water, accounted
for 8% of the portfolio by value, at 31 March 2020.
InfraRed completed two investments in OFTO assets for HICL
during the year to 31 March 2020. These diversified the Company's
portfolio of regulated assets and further diversification will come
with the completion of the Walney Extension OFTO, expected in
2020.
Affinity Water (6% of portfolio value at 31 March 2020) accepted
the Final Determination ("FD") from Ofwat on its business plan for
Asset Management Period 7 (April 2020 to March 2025) ("AMP7"), as
the final step in the 2019 Price Review ("PR19"). The resolution of
the PR19 process allows Affinity Water's management team to focus
on achieving the challenging operational efficiencies required for
AMP7. A value reduction of GBP39.9m associated with the expected
outcome of the FD was recognised at 30 September 2019 and has been
maintained at the year-end.
Funding and Capital
HICL has a strong balance sheet that has been bolstered further
during the year to 31 March 2020.
Firstly, a return to favourable equity market conditions early
in the second half enabled the Company to respond to investor
demand and undertake successful equity capital raising by way of
tap issuance of GBP117m. The funds raised were deployed to repay
short-term borrowings and support the acquisition strategy.
InfraRed also successfully extended the Company's Revolving
Credit Facility in April 2020(1) , a notable achievement in
volatile capital markets which illustrates the ongoing support of
the Company's lenders. The facility had GBP321m available at 31
March 2020 and thus HICL has good liquidity, putting the Company in
a strong position in the current environment, with the ability to
pursue attractive investment opportunities selectively.
Sustainability
HICL's Sustainability Policy
Investing sustainably is central to HICL's business model. It
means ensuring each portfolio company takes responsibility for its
environmental, social and governance impacts, risks and
opportunities. It is only when environmental, social and economic
sustainability come together in a strong governance framework that
the investment proposition can be delivered in the long term.
The roles and responsibilities of the Board and InfraRed in
respect of sustainability are set out in HICL's Sustainability
Policy (published on www.hicl.com) and rigorously applied across
the HICL portfolio. This includes a robust approach to corporate
governance, with strong controls in place at corporate level for
HICL, and board representation by InfraRed Asset Managers at
portfolio company level.
HICL's Policy states that the Company:
-- Invests in assets which have a social purpose, which promote
social development and quality of life;
-- Creates a positive environmental impact now and for future generations;
-- Makes an overall beneficial impact on the communities in which our assets are located; and
-- By doing so, aligns the interests of stakeholder groups of
HICL's investments, aligned to its role as a trusted steward of
core infrastructure assets for the long term.
InfraRed's approach to Sustainability
InfraRed has a strong track record as a responsible investor and
partner, which includes a commitment to the Principles for
Responsible Investment ("PRI"), with InfraRed's infrastructure
business maintaining its A+ rating for a fifth year.
InfraRed's Sustainability Policy, including our commitment to
fully integrating sustainability into the investment processes, is
published on our website (www.ircp.com).
Based on our values and supported by recognised guidance
frameworks such as the PRI, we prioritise our resources to make a
positive contribution to the UN's Sustainable Development
Goals.
Health and Safety is a core component of a sustainable business.
InfraRed has ensured that all of the Group's portfolio companies
providing operational services and / or undertaking maintenance
have a health and safety policy.
InfraRed is committed to minimising its own environmental impact
where possible and intends to be a net zero carbon firm for 2019
and 2020, by offsetting its emissions using an accredited
offsetting scheme.
Key Risks
Each quarter the Board's Risk Committee reviews the risk
appetite of the Company. This includes an assessment of emerging
risks, supported by comprehensive stress testing and associated
mitigation strategies provided by InfraRed.
Risks are reviewed and steps are taken to reduce the impact on
stakeholders, including the Company's shareholders.
Changes in GDP
Current government actions to limit the spread of Covid-19 have
resulted in reduced economic activity worldwide. HICL's key
demand-based assets (the A63 Motorway, Northwest Parkway and High
Speed 1) have been impacted by the resulting downturn in the
economies in which they are located (UK, Eurozone and USA).
In the near-term there is uncertainty over both the duration of
the downturn and its severity. The timing and shape of the recovery
of economic activity in these regions will influence the financial
performance of HICL's demand-based assets. The important role that
these assets play in connecting regions and facilitating the
movement of people and goods means they are well-positioned to
benefit from the economic recovery.
Political and regulatory risk
Politics and regulation are key underlying risks that are
inherent in infrastructure investment.
InfraRed remains committed to active involvement in the UK
national debate on the future of infrastructure financing and
regulation.
As previously disclosed in the Company's Interim Report, in
April 2019 InfraRed made a submission to the National
Infrastructure Commission for its The Future of Regulation Study
and, in June 2019, responded to the Infrastructure Finance Review
Consultation jointly launched by HM Treasury and the Infrastructure
and Projects Authority. We also continue to engage with political
influencers through active involvement with key industry bodies,
such as the AIC, the Global Infrastructure Investor Association and
The Infrastructure Forum.
Counterparties
The nature of the contractual frameworks that underpin many of
the investments that InfraRed makes on behalf of HICL necessitate
close partnerships with a range of counterparties. These include
customers or clients, lenders, and delivery partners, including
construction and maintenance sub-contractors.
The success of these relationships is fundamental to the
delivery of HICL's Investment Proposition for shareholders and
communities alike. Through its Asset Management team, InfraRed
builds strong working relationships at multiple levels to affect
its 'partnership-first' approach, prioritising working together to
deliver optimal outcomes.
We actively seek regular contact with key counterparties
throughout the supply chain and with revenue-providing
counterparties, while InfraRed's in-house credit team actively
monitors the financial strength and stability of all these
entities. Monitoring efforts are even more important in times of
market stress, such as we are seeing from Covid-19.
On PPP projects, one key area of interaction with project
subcontractors, lenders and public sector counterparts is in
relation to the remediation of identified construction defects on
operational assets which, if unresolved, can impact on asset
availability and/or the ability for projects to make distributions
to investors. Liability for construction defects within certain
contractual and statutory time frames typically falls to the
construction subcontractor. Driving the resolution of construction
defects as they are identified is a key priority of our active
management of the HICL portfolio.
The onset of Covid-19 is expected to affect the ability to
investigate and remediate defects on certain assets (e.g.
hospitals) and has necessarily shifted the focus of all asset
stakeholders to the heightened operational requirements of the
facilities. Where project distributions are being held back due to
identified construction defects, the time frames around the release
of these may be delayed as a result: this is reflected in the
portfolio valuation and cash flow forecast.
Market and Outlook
In the near-term, and particularly with respect to Covid-19, we
are focused on prioritising active management of HICL's portfolio.
Our Asset Management team is working in close partnership with both
clients and key service providers to protect the service delivery
of essential public infrastructure and preserve the value in HICL's
portfolio for shareholders.
With uncertainty stemming from Covid-19 continuing to affect
financial markets and society more generally, we are maintaining a
cautious approach to assessing investment opportunities for HICL.
Nonetheless, during the latter stages of the financial year we have
developed an attractive pipeline of core infrastructure assets and
continue to keep these under review.
Now, more than ever, the attractions of predictable, long-term
cash yields from core infrastructure continue to appeal to
institutional investors. Notwithstanding the impact of Covid-19,
the underlying portfolio continues to perform well in these
conditions. Whilst those assets with demand exposure are
undoubtedly affected by the unprecedented global restrictions on
movement, they are well-positioned to benefit from the resumption
of economic activity.
The longer-term future for infrastructure investment will also
continue to generate opportunities for HICL, with Oxford Economics
estimating that c. US$3.7tn must be invested in infrastructure
globally every year to 2040, over US$1.3tn of which is accounted
for by Europe, the Americas and Oceania(4) . In developed markets
this is required to sustain economic and population growth, taking
the form of new investment and the upgrading of aging asset
estates.
We expect that new opportunities will arise to further enhance
the Company's portfolio construction and improve key portfolio
metrics, and InfraRed will selectively act on these for HICL.
1. On 3 April 2020, a one year extension of HICL's GBP400m
Revolving Credit Facility, to 31 May 2023, was signed with seven of
the eight existing lenders (minus Lloyds) totalling c. GBP360m, on
the same commercial terms
2. Including profits on disposal of GBP16.4m (2019:GBP34.0m)
3. Excluding the impact of Covid-19 and the previously disclosed
reduction in the value of Affinity Water
4. Oxford Economics and Global Infrastructure Hub "Global
Infrastructure Outlook: Infrastructure investment needs, 50
countries, 7 sectors to 2040", July 2017
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report
and financial statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law they are
required to prepare the financial statements in accordance with
International Financial Reporting Standards as adopted by the EU
and applicable law.
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of HICL and of its profit or loss for
that period. In preparing these financial statements, the Directors
are required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and estimates that are reasonable, relevant and reliable;
-- state whether they have been prepared in accordance with IFRSs as adopted by the EU;
-- assess HICL's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern;
and
-- use the going concern basis of accounting unless they either
intend to liquidate HICL or to cease operations, or have no
realistic alternative but to do so.
The Directors are responsible for keeping proper accounting
records that are sufficient to show and explain HICL's transactions
and disclose with reasonable accuracy at any time the financial
position of HICL and enable them to ensure that its financial
statements comply with the Companies Act 2006. They are responsible
for such internal control as they determine is necessary to enable
the preparation of financial statements that are free from material
misstatement, whether due to fraud or error, and have general
responsibility for taking such steps as are reasonably open to them
to safeguard the assets of HICL and to prevent and detect fraud and
other irregularities.
Under applicable law and regulations, the directors are also
responsible for preparing a Strategic Report, Directors' Report,
Directors' Remuneration Report and Corporate Governance Statement
that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on HICL's
website. Legislation in the UK governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
Directors' Responsibility Statement
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 lossof
HICL; 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 HICL's position and
performance, business model and strategy.
By order of the Board
Authorised signatory
Aztec Financial Services (UK) Limited
Company Secretary
19 May 2020
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:
www.morningstar.co.uk/uk/NSM . It can also be obtained from the
Company Secretary or from the Investor Relations section of the
Company's website, at www.HICL.com . A direct link to the PDF of
the Annual Report is also included here :
www.hicl.com/AnnualReport2020
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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