Interim Results 6 months ended 30th September 2023
22 November 2023
HICL Infrastructure PLC
INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2023
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 2023. The Interim Report is available at the following link: https://www.hicl.com/InterimReport2023
Highlights
For the six months ended 30 September 2023
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HICL's portfolio performed in line with expectations during the period, delivering an underlying return1 of 8.2% (30 September 2022: 13.0%), ahead of the expected return of 7.2% as at 31 March 2023, before macroeconomic adjustments to the discount rate, inflation and interest rates. |
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A decrease of 5.5p in Net Asset Value to 159.4p (31 March 2023: 164.9p), reflecting the increase of the portfolio's weighted average discount rate from 7.2% to 8.0%. |
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The increase in the discount rate reflects increased long-term government bond yields balanced by the Company's own recent cross-sector and cross-geography transactions, all sold at or above their respective valuation at 31 March 2023. |
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Transaction activity in the period totalled £532m, demonstrating our active approach to asset rotation and portfolio enhancement: |
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£208m of acquisitions across two investments: Altitude Infra (fibre, France) and Hornsea II OFTO (electricity transmission, UK). |
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£324m of divestments, spanning a portfolio sale of four UK PPP projects and half of HICL's investment in the Hornsea II OFTO (UK); a partial disposal of the Northwest Parkway toll road (US); the sale of Bradford BSF Schools PPP, phases 1 and 2 (UK); and the sale of University of Sheffield accommodation (UK). All divestments were made at or above their respective valuation at 31 March 2023. |
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Disposal proceeds will be used to reduce floating rate debt exposure, in line with the Company's disciplined capital allocation approach. On completion of disposals, the RCF is expected to be c.£115m drawn, bringing fund gearing down to be c.10%. |
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Contractual inflation linkage embedded in HICL's assets supported an increase in cash generation, with dividend cash cover excluding profits on disposals improving to 1.05x over the period (September 2022: 1.03x). Including profits on disposals cash cover is 1.35x (September 2022: 1.58x). |
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The Board reaffirms that HICL remains on track to deliver its target dividend of 8.25p per share for the financial year ending 31 March 20242. |
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The Board reiterates its dividend guidance of 8.25p per share for the year ending 31 March 20252, reflecting an appropriate balance between delivering short-term yield and enhancing HICL's long-term earnings base, particularly as its PPP concessions approach maturity. |
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The Board's priority remains disciplined capital management, in particular, the reduction in short-term floating debt. The bar for new investments remains very high, informed by the cost of debt and the relative attractiveness of buying back shares. |
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1. Performance of the portfolio relative to the opening weighted average discount rate
2. 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)
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for the six months to |
30 September 2023 |
30 September 2022 |
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Income1 |
£10.9m |
£125.8m |
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Total Return2 |
£(27.6)m |
£102.6m |
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(Loss) / Earnings per share ("EPS") |
(1.4p) |
5.2p |
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Target dividend per share for the year |
8.25p |
8.25p |
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1. Income was £(24.7)m on an IFRS Basis (2022: £104.5m) 2. Total Return was £(27.6)m on an IFRS Basis (2022: £102.6m) |
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Net Asset Value |
30 September 2023 |
31 March 2023 |
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NAV per share |
159.4p |
164.9p |
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Interim Dividend |
2.06p |
2.07p |
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NAV per share after deducting interim dividend |
157.3p |
162.8p |
Mike Bane, Chair of HICL, said:
"The Board and I are pleased with the active management of HICL's portfolio and the solid operating result against a difficult market backdrop. Continued progress on strategic asset rotation has served to improve portfolio composition, while supporting the Company's Net Asset Value. This transaction activity, which has been across geographies, sectors and counterparties, gives the Board a high level of confidence in HICL's NAV and reinforces the belief that the Company's shares have been materially oversold by public markets."
Edward Hunt, Head of Core Income Funds at InfraRed Capital Partners, HICL's Investment Manager added:
"HICL continues to withstand the volatile macro environment, with solid underlying asset performance and resilient asset valuations as demonstrated by our asset disposals during the period which have sold at a premium. The focus on strong balance sheet management informs HICL's proactive capital allocation strategy, with disposal proceeds used to materially reduce the RCF. The Company's strong track-record of accretive asset rotation stands it in good stead to self-fund its future investment activities, as required, and continue to enhance HICL's investment proposition for shareholders."
Chair's Statement
HICL's results for the first half of the year demonstrate strategic asset rotation, improving portfolio composition and validating the Company's Net Asset Value.
In a period dominated by significant structural shifts in the macroeconomic environment, HICL's core infrastructure assets continued to perform in line with expectations. The Company's diversified portfolio benefits from predictable long-term cash flows which are positively correlated to inflation and insulated in large part from economic and financial market volatility. These defensive attributes are a key attraction of the core infrastructure asset class and underpin the durability of HICL's long-term investment proposition.
Given market conditions, the Board and Investment Manager have been particularly focused on the active management of HICL's portfolio and balance sheet. During the period, over £320m of asset sales have been announced at or above their respective valuation at 31 March 2023. These sales improve portfolio composition, validate the Company's Net Asset Value ("NAV") and, on completion, reduce exposure to floating rate debt. This exposure was also reduced in the period by completing a £150m private placement and capping £200m of floating interest rate exposure on the Revolving Credit Facility ("RCF").
Despite the solid operating performance of the portfolio and transaction evidence for the intrinsic value of HICL's assets, the higher interest rate environment has severely impacted the Company's share price in the period, with HICL trading at a significant discount to NAV. The Board believes that there is a significant disconnect between the value ascribed to the Company's portfolio by public markets, compared to the valuations consistently demonstrated in private markets through the Company's asset sales. This transaction activity, which has been across geographies, sectors and counterparties, gives the Board a high level of conviction in the reported NAV and reinforces the belief that the Company's shares have been materially oversold by public markets. Compared with fixed income products, HICL offers higher nominal returns, with inflation protection and the potential for capital growth and outperformance. The share price at 30 September 2023 implies a long-term expected return from the portfolio of 8.9% p.a. net of costs1. The Board believes this represents compelling risk-adjusted value.
Financial performance
The Company's NAV at 30 September 2023 was 159.4p (March 2023: 164.9p). The loss per share was (1.4)p (September 2022: earnings of 5.2p). Total Shareholder Return ("TSR")2 on an annualised basis was (1.7)% (September 2022: 6.7%) and the underlying Annualised Return from the portfolio was 8.2%3 (September 2022: 13.0%), which exceeds the Company's weighted
average discount rate of 7.2% as at 31 March 2023.
The movement in the NAV per share from 164.9p at 31 March 2023 to 159.4p at 30 September 2023 was primarily driven by increases in discount rates. The 80bps increase in the weighted average discount rate to 8.0% reflects higher interest rates across HICL's key geographies and was partially offset by higher inflation (both forecast and actual) and by increases in deposit rates (see full updated assumptions on page 13 of the full Interim Report linked above).
A detailed explanation of the factors affecting the valuation is set out in the Valuation of the Portfolio section starting on page 11 of the full Interim Report linked above.
Accretive investment activity
Strategic asset rotation has consistently been a key driver of shareholder value for HICL, with 25 asset disposals amounting to over £830m since IPO. These have contributed over 7.5p to NAV and provide an important source of capital outside capital markets.
Over the last 18 months, HICL's portfolio has significantly evolved with over £745m4 of new high-quality core infrastructure investments, funded in a large part through over £430m5 of disposals. This active management has improved portfolio composition, increased diversification and delivered shareholder value despite challenging equity market conditions.
More information on these transactions can be found in the Investment Manager's Report, on page 6 of the full Interim Report linked above.
Financing
On completion of disposals announced in the period, the Company's £650m RCF is expected to be c.£115m drawn, down from £494m at its peak in April 2023, with gearing reduced from 16% to 10%.
In addition to disposals, the Manager executed on several initiatives to further reduce floating interest rate exposure in the period. Further information is given 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 2024, which is expected to be cash covered. The Board also reiterates its dividend guidance of 8.25p per share for the year ending 31 March 2025.
The Board notes that the contractual inflation linkage embedded across HICL's assets, is now beginning to flow through to uplifted cash flows, having already been recognised in the NAV. This has contributed to the increase seen in dividend cash cover to 1.05x (March 2023: 1.03x) and the Board expects this upward trend to continue.
Sustainability leadership
As part of the Board's commitment to continuous improvement, a sustainability investor perception survey was commissioned during the period to allow the Board to better evaluate HICL's performance in this critical area. Many of HICL's investors provided input on HICL's approach to sustainability strategy and disclosure. This valuable feedback will feed directly into the 2024 Sustainability Report, ensuring HICL's sustainability disclosures continue to improve alongside increasing Net Zero data collection at the portfolio level. I would like to personally thank those investors who participated.
Outlook
Against a challenging backdrop of unpredictable macroeconomic conditions, the Board remains highly focused on robust governance procedures. This includes oversight of the Company's transactions, capital allocation and processes, as well proactive engagement with investors.
HICL's portfolio offers investors a highly defensive set of cash flows and a resilient NAV which has been consistently validated through third-party transactions. The Board believes that the current disconnect in pricing between public and private markets for high-quality core infrastructure assets represents a unique opportunity for investors with a long-term mindset: a return of the Company's share price to NAV would represent a 29% return before dividends6.
In this environment the Board remains focused on appropriate capital allocation. The bar for new acquisitions is suitably high, informed by alternative uses of capital such as reducing the Company's floating rate debt or buying back shares. Additionally, market volatility has historically offered attractive investment opportunities for those companies that have maintained optionality through active balance sheet management. HICL's investors should expect the focus on self-funded and accretive portfolio rotation to continue, with live disposal activity at the time of publication. In the longer term, the megatrends of decarbonisation and digitalisation are largely unaffected by short-term market volatility and continue to drive growth in the core infrastructure sector. This provides a compelling strategic backdrop for the Company to execute its long-term strategy.
Mike Bane, Chair
21 November 2023
1. Based on discount rate, less ongoing charges ratio, adjusted to reflect the share price discount to the NAV using published discount rate sensitivities
2. Based on interim dividends paid plus change in NAV per share
3. Calculated as portfolio return divided by the rebased valuation, annualised. Excludes changes in macroeconomic assumptions. More details provided in the APM section on page 20 of the full Interim Report linked above
4. Acquisitions since March 2022 includes: B247 Road, Fortysouth, Texas Nevada Transmission, Cross London Trains, Altitude Infra, Hornsea II OFTO
5. Disposals since March 2022 includes: Queen Alexandra Hospital, Northwest Parkway (partial), Bradford Schools Phase 1+2, Oxford John Radcliffe Hospital, Romford Hospital, South Ayreshire Schools, PSBP NE Schools, Hornsea II OFTO (partial) and Sheffield Student Accommodation
6. Based on the share price of 124.0p as at 30 September 2023
Investment Manager's Report
HICL's high-quality portfolio delivered a solid performance amidst volatile financial markets during the first half of the year.
Operational performance was in line with expectations, with key milestones achieved on some of the Company's largest assets.
Over the last six months, we have continued to execute the Company's strategy, evolving the portfolio through targeted acquisitions, balanced with selective asset sales. InfraRed's focus on portfolio rotation enhanced portfolio composition, validated asset valuations, and strengthened the Company's balance sheet.
HICL continues to offer investors a specialised investment proposition by providing exposure to a diversified portfolio of private core infrastructure assets, critical to the functioning of society. This provides investors with exposure to predictable and inflation-linked returns, and the potential for outperformance through capital growth delivered through InfraRed's active management approach. These factors set HICL apart from a wide range of investment opportunities, including fixed income.
The Investment Manager firmly believes that the current share price of HICL materially understates the demonstrated value of the portfolio. HICL's prevailing share price offers a highly attractive risk adjusted return and yield for investors.
Operational Highlights
Portfolio performance was solid over the first six months of the year, delivering an annualised return of 8.2% (13.0% at 30 September 2022), ahead of the expected return of 7.2% for the period (as at 31 March 2023) before the impact of changes to reference discount rates or macroeconomic assumptions.
This outperformance was predominantly a result of the portfolio's high correlation to inflation - further details can be found in the Valuation section starting on page 11 of the full Interim 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 in the period.
The Company's new modern economy assets (Fortysouth, Texas Nevada Transmission ("TNT") and Altitude Infra), have been successfully integrated into the portfolio and are performing well operationally.
The continued recovery of international travel post-Covid enabled High Speed 1 ("HS1") to resume shareholder distributions in the period, a key milestone for the project. Shortly after the end of the period, it was announced that a new international rail operator, Evolyn, had agreed to purchase 12 high-speed trains to launch a competitor service between London and Paris in 2025. The possibility of this initiative was an upside identified at acquisition and InfraRed will continue to work closely with the HS1 management team to support greater utilisation of the HS1 infrastructure.
In September 2023, Affinity Water submitted its business plan to Ofwat for the upcoming periodic price review in 2024 ("PR24"). The significant investment envisaged under the plan is expected to result in the company's RCV growing by over 32% in real terms between April 2025 and March 2030. The plan is fully funded and HICL may consider funding a portion of the growth outlined in Affinity's plan with equity during AMP 8, contingent on receiving a fair final determination from Ofwat in December 2024, including the resumption of equity distributions.
Further details of the operational performance of HICL's largest assets and the PPP portfolio can be found on pages 8-10 of the full Interim Report linked above.
Accretive investment activity
Optimising portfolio construction through active management and asset rotation is a key driver of shareholder value, and this was demonstrated in the period.
The combined acquisition and disposal activity over the first half of the financial year contributed positively to HICL's key portfolio metrics of yield, total return and weighted average asset life.
During the period, HICL signed and completed two targeted investments totalling £208m:
- Altitude Infra (France), the largest independent wholesale fibre network in rural France (3% of the Directors' Valuation); and
- Hornsea II OFTO (UK), the offshore transmission assets associated with the world's largest installed windfarm (2% of the Directors' Valuation).
Importantly, HICL added to its strong track record of disposals in the period. The recent disposals take the total asset sales to over £830m across 25 investments since IPO adding over 7.5p to the Company's NAV. This is the most extensive track record of asset rotation of any core infrastructure investment company.
Accretive disposals in the period, amounting to over £320m, were made at or above their respective valuation at 31 March 2023, as set out below:
- A portfolio sale comprising four UK PPP projects; Queens (Romford) Hospital, Oxford John Radcliffe Hospital, Priority Schools North East Batch and South Ayrshire Schools, in addition to half of the Company's investment in the Hornsea II OFTO for c.£200m;
- Northwest Parkway (US), a partial disposal for $86m crystallising an 11.0% holding period IRR since the initial investment in December 2016;
- Bradford BSF Phase 1 & 2 (UK), the combined sale of two PPP schools for c.£37m at an 8% premium to the 31 March 2023 valuation; and
- University of Sheffield Accommodation (UK), the sale of a concession with demand-based revenues for £18m.
InfraRed has a structured and objective methodology to identify assets suitable for sale, which takes into consideration key characteristics including inflation correlation, asset life and yield to ensure an appropriate portfolio mix.
The assets were sold to various counterparties and spanned a range of sectors, geographies and revenue types. They are a good representation of HICL's total portfolio, and evidence the resilience of valuations for high-quality core infrastructure.
Critically, given the wider macroeconomic environment, these disposals have enabled HICL's strategic portfolio evolution over the last 18 months to be significantly self-funded.
Financial highlights
The Company's NAV per share decreased by 5.5p over the period to 159.4p at 30 September 2023 (31 March 2023: 164.9p). This reflected the increase of the portfolio's weighted average discount rate from 7.2% to 8.0% which was partially offset by higher actual and forecast inflation, higher interest on cash deposits, and positive underlying portfolio performance.
During the period, central bank base rates increased across all the markets in which HICL operates, reducing the Company's implied equity risk premium. Notwithstanding this, the Company carried out nine asset sales, at or above their respective valuations as at 31 March 2023. The movement in the weighted average portfolio discount rate of 80bps (100bps in the UK) balances these important external data points. The adoption of higher inflation assumptions for the portfolio valuation better aligns with long-term market expectations and is consistent with the observed transaction activity.
Further detail on the approach to valuation can be found in the Valuation section of this report starting on page 11 of the full Interim Report linked above.
The Board and InfraRed have been focused on maintaining a strong balance sheet and have taken a proactive approach to ensure that the Company is best placed to operate in a higher interest rate environment:
- In May 2023, HICL completed a £150m Private Placement, effectively converting existing short-term drawings to a longer maturity (10- and 12-year tranches), reducing interest rate risk and diversifying the Company's sources of funding;
- To protect against further rises in interest rates, in July 2023 the Company purchased an option to cap £200m of its SONIA exposure to 6.5% for three years; and
- Proceeds from the nine disposals announced in the period have been, and will continue to be used to pay down the Company's RCF, which is forecast to be c.£115m drawn once the announced transactions complete.
In combination, these initiatives reduced HICL's fund level gearing to 10% and the cap ensures that the Company has limited exposure to floating interest rates.
Further information on the Company's financial performance can be found in the Financial Review section starting on page 17 of the full Interim Report linked above.
Sustainability
The decarbonisation of existing infrastructure projects is a goal shared by the private and public sector, and the scale of the challenge will require a true partnership approach given the contractual frameworks were developed long before net zero targets. During the period, InfraRed's Asset Management and Sustainability teams contributed heavily to the Infrastructure and Projects Authority (IPA) Net Zero Working Group, feeding directly into the publication of the Decarbonisation of Operational PFI Projects handbook. A key pillar of this work has been the agreed standardised approach to data collection to support the measurement of greenhouse gas emissions from PFI projects, which will be reflected in HICL's 2024 Sustainability Report.
Key risks update
HICL's risk appetite statement, approach to risk management and governance structure are set out in the Risk and Risk Management section of HICL's 2023 Annual Report, 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 2023. Notable updates against these risks in the period are summarised below.
Macroeconomic risk
The Investment Manager notes the challenging macroeconomic environment which has negatively affected the Company's share price, alongside the wider listed real asset market segment. Whilst InfraRed believes the Company's shares have been oversold and that it has consistently demonstrated the validity of its NAV through deliberate disposals, a persistently high interest rate environment may inhibit HICL's ability to issue new equity capital. The key mitigant to closed public equity markets is active portfolio rotation through further targeted asset sales to raise the capital needed to fund new investments and repay debt facilities. This was clearly demonstrated in the period and continues to be the Company's near term focus.
There remains the possibility of further interest rate increases across HICL's investment geographies, which would increase the cost of floating rate debt at both asset and fund levels. HICL's portfolio gearing is 67% (31 March 2023: 66%) however the vast majority of asset level debt is fixed and termed for the duration of each concession, removing floating rate risk. There are six assets in the portfolio, predominantly assets with perpetual lives, which have refinancing requirements exposing them to interest rate risk. These assets have lower gearing than the portfolio average, and refinancing timings are carefully managed. At the fund level, the drawn balance of the Company's RCF is subject to floating rate risk. This was mitigated in the period through the conversion of £150m of short-term floating-rate borrowings into a fixed-rate private placement, as well as the purchase of an option to cap £200m of exposure, as detailed above.
Further detail on the portfolio's interest rate sensitivity can be found in the Valuation section on page 15 of the full Interim Report linked above.
Political and regulatory risk
The Investment Manager notes the key political elections expected to occur in the next 12 months in the UK, USA and Europe. Any change of national government brings the possibility of policy change in relation to existing infrastructure projects, as well as the future procurement of urgently needed new infrastructure.
Existing contractual frameworks provide a high level of protection to investors from government intervention and the political consensus across HICL's key jurisdictions on the need for continued investment to maintain and replace ageing infrastructure is a key mitigant against this risk. This accepted need for infrastructure investment, and the role of private capital in support, is expected to provide attractive opportunities for the Company in due course.
HICL's approach to diversifying political and regulatory risk across jurisdictions helps protect the portfolio from localised risks. HICL's portfolio is now comprised of 63% of assets within the UK (31 March 2023: 64%), with the balance of the portfolio invested in Europe, North America and New Zealand.
In the UK, the Investment Manager notes heightened public scrutiny of the water sector, with several companies subject to investigations and negative media attention over claims of illegal wastewater discharge practices. Affinity Water is a water only company with no wastewater operations, distinguishing it from those companies which may face specific action in this area. Affinity Water was rated as an 'average' performer (in line with the highest awarded grade) in Ofwat's recently published Water Company Performance Report. InfraRed believes Affinity Water is well positioned for PR24. Further information on Affinity's operating performance is given on page 8 of the full Interim Report linked above.
Market and outlook
The volatile macroeconomic environment continues to be the primary driver of public market valuations across the real assets sector, with this trend set to continue until markets establish greater certainty over the rate cycle. However, resilient valuations evidenced in the period continue to demonstrate a disconnect between private and public market valuations for attractive core infrastructure.
As long-term investors through multiple cycles, it is the Investment Manager's experience that such an environment can present attractive investment opportunities via special situations, including with reduced competition. The bar for new investments is high, set by the relative attractiveness of repurchasing shares, the cost of the Company's debt facilities, and the desire to further reduce the balance of HICL's RCF. InfraRed will continue to evaluate investment opportunities on a case-by-case basis and with a high degree of investment discipline. The Company's strong track record of accretive asset rotation stands it in good stead to self-fund its future investment activities, as required, and continue to enhance HICL's investment
proposition for shareholders.
Directors' Statement of Responsibilities
We confirm that to the best of our knowledge:
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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 |
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the interim management report, comprising the Chair'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
21 November 2023
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: https://www.hicl.com/InterimReport2023
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