HICL Infrastructure Regulatory News (HICL)

HICL Infrastructure: New research

25/02/2019

· HICL Infrastructure offers predictable cashflows, uncorrelated to the economic cycle through a portfolio of institutional-quality, lower-risk infrastructure assets

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HICL offers shareholders an exposure to institutional quality, lower risk infrastructure assets. The manager, InfraRed Capital Partners, has an emphasis on achieving strong income returns, generated through sources as robust and diverse as possible. Certainly, with Carillion a relatively fresh memory, and with no corresponding adverse impact on the dividend paid by HICL, the diversified approach looks like it is, well… paying dividends.

The majority of the company's assets offer predictable cashflows, and are uncorrelated to the economic cycle. The manager has been investing a greater part of the portfolio in demand-based assets, which can have returns more correlated to GDP and inflation, but also have a significantly longer life than traditional PFI / PPP assets. Whilst allocations to these types of assets have risen from 9% of NAV in March 2017 to 19% at the current time, the manager has a soft limit of 20% to ensure that the portfolio, as a whole, is largely uncorrelated with the wider market.

At the heart of HICL is a portfolio of investments with annuity-type income. As such, in our view, the longevity of the assets owned by HICL is important, given that at the end of each contract's life there is a zero terminal value. The manager has been successfully extending the average portfolio duration over time. Indeed, over the year to 30 March 2018, the managers succeeded in increasing the weighted average asset life from 24.4 years to 29.5 years.

On a total return basis, HICL's NAV return has outperformed UK equities since IPO, delivering a total return of 9.5% p.a. to 30 September 2018. The team performed a ten-year review of the various drivers of returns since inception to 31 March 2016. InfraRed believes that the NAV was ahead of forecast by 44.2p, of which 30p was due to "alpha" (or portfolio outperformance derived from the actions of the manager), and 14.2p due to "beta" (or economic factors such as a decline in corporate tax rates, and discount rates declining). The company continues to deliver solid and consistent positive returns. However, infrastructure investment risks, as well as the value of having an experienced manager behind the wheel, were shown in early 2018 with the insolvency of Carillion which in time (after the dust has cleared) is currently expected to have had an impact on NAV of around 1%.

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