Interim Results 6 months ended 30th September 2022
23 November 2022
HICL Infrastructure PLC
INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2022
This announcement contains Inside Information.
The Board of HICL Infrastructure PLC ("HICL", or the "Company") announces Interim Results for the Company for the six months ended 30 September 2022. The Interim Report is available at the following link: http://www.hicl.com/InterimReport2022
Highlights
For the six months ended 30 September 2022
· HICL delivered a resilient result in the period, with Net Asset Value ("NAV") growth of 1.2p per share to 164.3p (March 2022: 163.1p) and an Annualised Total Shareholder Return1 of 6.7% (September 2021: 9.8%) despite an uncertain macroeconomic and geopolitical environment.
· 50bps increase in the portfolio's weighed average discount rate to 7.1% at 30 September 2022 (31 March 2022: 6.6%) recognising the uplift in long-term government bond yields, particularly in the UK.
· The financial impact of the change in discount rates was offset by higher actual and forecast inflation, demonstrating the benefit of HICL's highly diverse portfolio, which continues to offer the highest inflation correlation in the listed core infrastructure peer group at 0.8x.
· Total return declined to £102.6m (September 2021: £ 139.5m) driven by the movement in discount rates relative to the prior period. In September 2021, the weighted average discount rate reduced to 6.6%.
· The Directors' Valuation2 increased by 17% to 3,865.6m at 30 September 2022 (31 March 2022: 3,311.0m) .
· Four significant high-quality core infrastructure acquisitions were announced in the period, totalling c.£616m. These investments, spanning both traditional and modern economy sectors, will bolster HICL's resilience through increased sector and geographic diversity and contribute positively to key portfolio performance metrics.
· The Board reaffirms that HICL is on track to deliver its target dividend of 8.25p per share3 for the year to March 2023, with cash cover in the period improving to 1.58x, or 1.03x excluding profits on disposal versus original cost (30 September 2021: 1.04x / 1.02x).
· The Board has reaffirmed its dividend guidance of 8.25p per share for the year to 31 March 20243.
· HICL raised gross proceeds of £160m via an oversubscribed tap issue during the period, which restored capacity in the Company's Revolving Credit Facility ("RCF") and provided additional financial resources to pursue the Company's pipeline.
· At 30 September 2022, HICL had £713m of headroom in its RCF and £79m of cash to fund its commitments to invest in ADTiM, Texas Nevada Transmission and Aotearoa Towers of c.£513m.
· HICL's high-quality core infrastructure portfolio is well positioned to withstand heightened market volatility, with assets that have robust capital structures and a portfolio that offers low overall beta to wider equity markets, a high yield and strong inflation protection.
1. Based on interim dividends paid plus change in NAV per share
2. The Directors valuation is an Alternative Performance Measure. It comprises the fair value of the investment portfolio together with £583.5m (31 March 2022: £94.4m) of future investment commitments in respect of a UK healthcare project, ADTiM (France), Aotearoa Towers (New Zealand), Texas Nevada Transmission (USA), the B247 road project (Germany) and the Blankenburg Tunnel (Netherlands)
3. This is a target only and not a profit forecast. There can be no assurance that this target will be met
Summary Financial Results
(On an Investment Basis)
|
for the six months to |
30 September 2022 |
30 September 2021 |
|
|
|
|
|
Income1 |
£125.8m |
£157.2m |
|
Total Return2 |
£102.6m |
£139.5m |
|
Earnings per share ("EPS") |
5.2p |
7.2p |
|
Target dividend per share for the year |
8.25p |
8.25p |
|
1. Income was £104.5m on an IFRS Basis (2021: £141.1m) 2. Total Return was £102.6m on an IFRS Basis (2021: £139.5m) |
||
|
Net Asset Value |
30 September 2022 |
31 March 2022 |
|
NAV per share |
164.3p |
163.1p |
|
Interim Dividend |
2.06p |
2.07p |
|
NAV per share after deducting interim dividend |
162.2p |
161.1p |
Mike Bane, Chair of HICL, said:
"This is a resilient result, reflecting a productive six months for the Company. We are operating in an uncertain macroeconomic and geopolitical environment and these results highlight the strength of HICL's defensive positioning with increases to Net Asset Value per share and dividend cash cover achieved in the period. With continued inflationary pressures, the Company's 0.8x inflation correlation offered by HICL's portfolio remains a key attraction for investors.
"I would like to thank existing and new shareholders for their support in the Company's oversubscribed equity issue in the period as HICL continues to execute on its vision of enriching lives through infrastructure."
Edward Hunt, Head of Core Income Funds at InfraRed Capital Partners, HICL's Investment Manager added:
"HICL's approach to portfolio composition continues to drive the delivery of sustainable income and NAV growth to its shareholders. Underlying performance in the period has been pleasing, aided by the considered portfolio positioning to capture elevated levels of inflation. HICL's high-quality asset mix was complemented in the period with four targeted acquisitions, which capitalise on the key megatrends of decarbonisation and digitalisation and contribute positively to key portfolio metrics and diversification. InfraRed's focus remains on the successful onboarding of new assets via our regional asset management platforms as well as the targeted pursuit of HICL's advanced pipeline."
Chair's Statement
It is my pleasure to write to you for the first time as Chair of HICL Infrastructure PLC. This report details a productive first half of the year and resilient financial results.
The Company is operating in an uncertain macroeconomic and geopolitical environment, with significant central bank responses to persistent high inflation across HICL's core markets. Against such a backdrop, this interim result highlights the strength of the Company's defensive positioning with an increase in dividend cash cover and a Total Shareholder Return ("TSR") of 6.7%1 on an annualised basis.
HICL's robust performance over this period is a result of its careful portfolio construction. Assembling assets with low beta, high inflation correlation and robust capital structures serves to protect portfolio value, particularly in higher inflation and interest rate environments. HICL continues to offer the highest inflation correlation within the listed core infrastructure peer group2.
HICL announced four significant new investments during the period spanning both traditional and modern economy sectors. These acquisitions add valuable diversification across attractive markets, improve portfolio metrics and further position the Company for growth. They also deliver on the Company's vision: to enrich lives through infrastructure by delivering strong social foundations, connecting communities, and supporting sustainable modern economies.
Financial performance
The Company delivered a resilient financial result in the six months to 30 September 2022, increasing its Net Asset Value ("NAV") by 1.2p per share to 164.3p. TSR1 on an annualised basis was 6.7% (September 2021: 9.8%) and the underlying Annualised Return from the portfolio was 13.0%3 (September 2021: 7.3%), in excess of the Company's weighted average discount rate (6.6% at 31 March 2022).
Performance was primarily driven by higher inflation (both forecast and actual), by increases in deposit rates and also the weakening of Sterling (see full updated assumptions on page 15 of the full Interim Report linked above). These factors offset the increase of 0.5% in the portfolio's weighted average discount rate to 7.1%. This reflects the significant increase in long-term government bond yields, particularly in the UK, and the corresponding reduction in the implied equity risk premium over the last six months.
A detailed explanation of the factors influencing the discount rate is set out in the Valuation of the Portfolio section starting on page 13 of the full Interim Report linked above.
Accretive investment
HICL's Annual Report for 31 March 2022 highlighted an attractive and advanced pipeline of investment opportunities, and I am pleased to report on the excellent progress made in the period.
Four high-quality, accretive core infrastructure acquisitions were announced in the period, representing c.£616m of value. These investments demonstrate InfraRed's differentiated capability to source high-quality investments for the Company. Following completion, the weighted average asset life of the portfolio will increase to 33 years (March 2022: 30 years), bolstering HICL's resilience and ability to deliver sustainable income and capital growth over the long term.
Part of the funding for the acquisitions comes from the completion of the disposal of the Queen Alexandra Hospital, which was itself accretive to key portfolio metrics. This active capital recycling is a valuable lever to optimise portfolio composition, deliver shareholder value and provide HICL with an additional funding source beyond primary share issuance.
At 30 September 2022, the Company had £713m of headroom in its Revolving Credit Facility ("RCF") and £79m of cash to fund its investment commitments of c.£513m. The Board remains comfortable with the Company's available liquidity.
More information on these new assets can be found in the Investment Manager's Report, starting on page 6 of the full Interim Report linked above.
Dividend guidance
The Board is pleased to re-affirm that HICL remains on track to deliver its target dividend of 8.25p per share for the financial year ending 31 March 2023, which is expected to be fully cash covered. The Board also reiterates the dividend guidance of 8.25p per share for the year ending 31 March 2024.
Predictable long-term cash flow forecasts support the Company's ability to deliver sustainable income, together with capital growth, to its shareholders. Cash generation from the portfolio was in line with expectations for the period, supporting the steady improvement in dividend cash cover to 1.58x, or 1.03x excluding profits on disposal versus original cost (March 2022: 1.04x / 1.02x).
HICL's dividend trajectory will continue to be calibrated against the Company's stated intention to rebuild dividend cash cover and enhance the long-term earnings profile of the Company.
Capital raise
In July 2022, the Company successfully raised gross proceeds of £160m via a tap issue. The issue was subject to a scaling back exercise, reflecting strong demand. This restored capacity in the Company's RCF and provided additional financial resources to pursue HICL's pipeline.
The strong participation by new and existing investors, including significant demand from direct retail investors, is evidence of the continued support that HICL's strategy enjoys from its shareholders.
Corporate governance
I am delighted to welcome two new non-executive directors, Liz Barber and Martin Pugh, to the HICL Board.
Liz has held multiple senior executive positions in the UK water sector, including serving as the CEO of Yorkshire Water. Prior to this, Liz served as an assurance partner at Ernst & Young. Martin brings over 35 years of experience in the infrastructure industry with a focus on development, construction and asset management. These appointments enhance the Board's expertise across the breadth of the Company's core infrastructure focus. I have no doubt shareholders will benefit from their highly relevant experience.
Sustainability leadership
Operating in a sustainable manner lies at the heart of HICL's business model. As a trusted steward of essential core infrastructure assets, the Company's ability to deliver sustainable income to its shareholders over the long term is intrinsically linked to delivering positive outcomes for those communities who depend on our assets. Over the first half of this financial year, the Company and the Investment Manager have progressed several initiatives designed to ensure that HICL remains at the forefront of sustainability best practice. This includes the launch of InfraRed's second underlying asset user survey, and the submission of interim greenhouse gas reduction targets as part of InfraRed's Net Zero Asset Managers commitment. Further details are provided on page 12 of the full Interim Report linked above.
Outlook
Political events in the UK since mid September 2022 have resulted in material levels of volatility in equity, debt and currency markets. The Board believes that HICL's high-quality core infrastructure portfolio is well positioned to withstand heightened volatility, with assets that have robust capital structures, low beta, high yield and strong inflation protection.
The outlook for inflation is expected to remain elevated in HICL's core markets in the short to medium term. In this context, the inherent inflation correlation built into HICL's cash flows at 0.8x (31 March 2022: 0.8x) remains a key attraction for investors in a rising interest rate environment.
Ageing infrastructure and the powerful global megatrends of decarbonisation and digitalisation continue to drive procurement and investment across HICL's core markets. A disciplined long term acquisition strategy, combined with continued active management of a high-quality, diversified portfolio allows the Company to provide sustainable income and capital growth to its shareholders. These qualities also position HICL to operate in challenging market conditions, and to unlock attractive new investment opportunities where appropriate.
Mike Bane, Chair
22 November 2022
1. Based on interim dividends paid plus change in NAV per share
2. Compared with the most recent reported publicly available information
3. Calculated as portfolio return divided by the rebased valuation. Excludes changes in macroeconomic assumptions
Investment Manager's Report
Operational Highlights
The underlying performance of the portfolio has been positive in the year to date, delivering an annualised portfolio return of 13.0% (7.3% at 30 September 2021), ahead of the expected return of 6.6% for the period (as at 31 March 2022) before the impact of discount rate changes.
This outperformance was a result of the portfolio's high correlation to inflation, as well as value enhancement initiatives carried out by the Investment Manager - further details can be found in the Valuation section, starting on page 13 of the full Interim Report linked above.
Operational performance overview
HICL's portfolio has performed in line with the Investment Manager's expectations. The Public Private Partnership ("PPP") portfolio performed well during the period, owing to its availability-based contracted revenues, inflation linkage and predominantly contracted costs, including fixed long-term debt. The Company's three large demand-based investments performed in line with valuation assumptions set at 31 March 2022, with no material impact on performance from the wider economic volatility. Affinity Water, the Company's largest regulated investment, performed in line with expectations during the period with higher actual and forecast inflation contributing positively to performance.
Further details of the operational performance of the portfolio can be found in the Operational Highlights on page 9 of the full Interim Report linked above.
Accretive investment activity
HICL has taken a considered and proactive approach to portfolio composition in order to deliver sustainable income and capital growth to its shareholders.
Strong progress has been made in delivering the attractive acquisition pipeline outlined in HICL's Annual Report for 31 March 2022. Four high-quality and accretive core infrastructure acquisitions were announced in the period, representing c.£616m1 of value:
- ADTiM (France), two rural fibre to the home concessions in France, which is subject to completion (2% of the Directors' Valuation);
- Aotearoa Towers2 (New Zealand), a passive mobile tower infrastructure owner with c.1,500 towers. Completed in November 2022 (5% of the Directors' Valuation);
- Cross London Trains (UK), a PPP asset comprising 115 electrified trains. Completed in the period (3% of the Directors' Valuation); and
- Texas Nevada Transmission, an investment spanning two distinct electricity transmission systems and over 800km of high-voltage transmission lines. Subject to completion (6% of the Directors' Valuation).
Overall, these investments will contribute positively to key portfolio metrics, particularly portfolio returns and the weighted average asset life, thereby extending the long-term earnings potential of the Company. Importantly, these investments also support the portfolio's overall inflation correlation and improve asset diversification. The acquisition activity in the period spans the critical themes of decarbonisation and digitalisation and plays an important role in delivering modern economy infrastructure.
Additional disclosure on HICL's newest investments can be found in the Operational Highlights starting on page 9 of the full Interim Report linked above.
Financial Highlights
The Company's NAV per share increased by 1.2p over the period to 164.3p at 30 September 2022 (31 March 2022: 163.1p). This reflected the portfolio's strong inflation correlation, positive underlying portfolio performance, and gains on foreign exchange, partially offset by a 0.5% increase in the weighted average portfolio discount rate to 7.1% (31 March 2022: 6.6%).
In recent years, the equity risk premium for infrastructure assets has expanded to historically high levels. This reflected the fact that long-term core infrastructure investors did not, typically, lower discount rates commensurately with decreasing interest rates. This has provided an element of inherent protection against increases in interest rates.
Over the last six months, long-term government bond yields, particularly in the UK, have increased significantly. Greater weight has been given to this development in the determination of HICL's weighted average discount rate as at 30 September, given the limited number of relevant asset transactions in the period. Further detail on the approach to determining discount rates can be found in the Valuation section of this report.
The recovery in dividend cash cover has continued, rising to 1.03x for the period, with solid cash generation from the underlying portfolio.
On 29 July 2022, the Company announced it had successfully activated a £330m accordion within its RCF, thereby increasing the Company's overall short-term credit facilities to £730m. At 30 September 2022, the headroom under the Company's facilities was £713m (31 March 2022: £265m), providing significant capacity to fund current acquisition commitments and support HICL's attractive pipeline, as appropriate.
Further information on the Company's financial performance can be found in the Financial Review section starting on page 19 of the full Interim Report linked above.
Sustainability
As Investment Manager to HICL, it is our belief that long-term success in owning and operating core infrastructure is intrinsically tied to sustainable business practices. HICL's licence to operate is predicated on responsible and transparent stewardship, and this continues to be an area of significant focus for the Investment Manager.
During the period, InfraRed has continued to make progress against the four focus areas identified in HICL's Sustainability Report published in May. In particular, data gathering for the new sustainability targets introduced under the Company's Environment, Social and Governance categories has been a priority, as well as driving social impact initiatives at the asset level. See page 12 of the full Interim Report linked above for more details on activities during the period.
In September, InfraRed achieved its seventh consecutive five-star rating in the United Nations Principles for Responsible Investment ("PRI") assessment. This is the highest possible PRI rating and spans both Investment & Stewardship and Infrastructure categories, reflecting InfraRed's commitment to its long-term vision of creating better futures through infrastructure.
Key Risks Update
HICL's risk appetite statement, approach to risk management and governance structure are set out in Section 3.5 of the Annual Report 2022 - Risk and Risk Management, which can be accessed on the Company's website at www.hicl.com .
The principal risks for the Company for the remaining six months of its financial year are unchanged from those reported on in the Annual Report 2022. There have been notable updates against these risks in the period, which are summarised below.
Macroeconomic risk
The Investment Manager notes the continuing inflationary pressures across HICL's core geographies and central bank interest rate rises in response.
The rise of government bond rates has led to pressure on infrastructure discount rates. The Company has recognised this by increasing the weighted average discount rate of the portfolio by 50bps to 7.1% (31 March 2022: 6.6%). There is a risk that fair value market discount rates could increase further, reducing the Directors' Valuation, all else being equal.
HICL's equity cash flows offer offsetting characteristics in a higher interest rate environment: namely, the positive correlation to inflation at 0.8x; the positive correlation to higher deposit rates on cash balances held in portfolio companies; and the low overall sensitivity to the impact of higher interest rates on financing costs across the portfolio.
The elevated level of government bond yields seen currently has not been experienced in over a decade. However, the Company has historically operated its business model successfully in such an elevated interest rate environment. From the Company's IPO in 2006 to March 2011, the average long-term government bond yield exceeded 4%. During this period, HICL was able to effectively execute its strategy; growing NAV, delivering the dividend, raising capital and deploying it into accretive investments.
The Investment Manager notes the likely entry of the UK into recession and the increased likelihood of recessions across HICL's other core markets. As at 30 September 2022, 19% of the portfolio (31 March 2022: 22%) was invested in assets with returns correlated to GDP, and recessionary risk has been reflected appropriately in the respective valuations of these assets.
HICL has a diverse portfolio of assets across developed OECD markets, and this helps to reduce the portfolio's sensitivity to GDP contractions or to outsized fiscal or monetary movements in any one jurisdiction. The portfolio continues to demonstrate its resilience in a challenging and volatile macroeconomic environment.
Political and regulatory risk
The Investment Manager notes the recent political instability in the UK and the impact this has had on financial markets. Whilst it has been encouraging to see a degree of stabilisation following the installation of a new government, the risk of further political volatility remains. The UK government recently set out its updated fiscal programme, and there is uncertainty around the impact this will have on the economy and financial markets.
HICL's approach to diversify political and regulatory risk across jurisdictions helps insulate the portfolio from localised risks. Including commitments, HICL's portfolio is now comprised of 62%3 of assets within the UK (31 March 2022: 73%), with the balance of the portfolio invested in Europe, North America and New Zealand.
At a project level, financial and operational pressures on public sector counterparties, including from persistent high inflation, have the potential to lead to behaviour from clients and their advisers that is adverse to the interests of the PPP. This has been experienced in a small number of cases in the UK healthcare portfolio. The Investment Manager aims to mitigate this risk through collaborative and proactive engagement with the public sector where disagreements arise. The financial impact to date of this dynamic remains immaterial to the portfolio but continues to present a risk to be managed.
Counterparty risk
Global supply chain pressures continue, due to the conflict in Ukraine, current macroeconomic environment and the long-term consequences of the Covid-19 pandemic. This has led to an increase in the cost of materials and labour. There is a risk of further supply chain disruptions.
These challenges have been successfully managed so far by the Company's service delivery partners, with no material impact on asset performance in the period. Regarding the Company's construction projects, the Paris-Saclay4 University project was completed in time to have students arrive at the new campus in September 2022, in line with the client's objectives. Supply chain disruption on the Blankenburg Tunnel project has been proactively managed with the client and we expect the substantive construction works to complete on schedule in 2024.
Overall, the Investment Manager continues to work closely with its public and private sector partners to proactively identify and manage supply chain issues arising.
This Interim Report provides the update above in the context of the Company's risk management framework and principal risks as disclosed in the Annual Report 2022.
Market and Outlook
HICL has a portfolio that is designed to be resilient in difficult market conditions. A higher interest rate environment requires adjustment from markets and investors but is not unprecedented in the Company's history.
Over the next six months, the Company will focus on successfully completing and embedding its new investments. This process will be aided by InfraRed's global platform, with detailed onboarding plans being implemented through InfraRed's London, New York and Sydney offices by the local investment and asset management teams.
Ageing infrastructure stock coupled with the strong secular tailwinds behind digitalisation and decarbonisation continue to drive infrastructure capital investment across HICL's key markets. The Company is part of the preferred bidder consortium on the Hornsea II OFTO in the UK and benefits from an advanced digital infrastructure pipeline in Europe.
The Investment Manager remains resolutely focused on the risk and return profile of any prospective investment and the impact on the portfolio's key metrics and balance sheet. InfraRed operates a multi-product and multi-strategy platform that is actively involved across the key segments of infrastructure investment. Its breadth of market presence across the asset class and risk spectrum enables HICL to be well positioned to selectively capture growth opportunities.
1. The Company also made a small follow on investment into RMG Roads, resulting in a total of £619m of acquisitions for the six-month period to 30 September 2022
2. Currently in the process of being re-branded as Fortysouth
3. Directors' Valuation, which includes future commitments
4. Previously known as the Paris Sud University
Directors' Responsibility Statement
We confirm that to the best of our knowledge:
· the condensed set of financial statements has been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting ("IAS 34") as adopted by the United Kingdom; and
· the interim management report, comprising the Chairman's Statement, Investment Manager's Report and Financial Results, includes a fair review of the information required by:
a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and
b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.
On behalf of the Board
Mike Bane, Chair
22 November 2022
Publication of documentation
The above information is an extract of information from HICL's Interim Report. The Interim 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 Interim Report is also included here
:
http://www.hicl.com/InterimReport2022
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