Annual Results for the year ended 31 March 2023
24 May 2023
HICL Infrastructure PLC
ANNUAL RESULTS FOR THE YEAR ENDED 31 MARCH 2023
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 2023. The Annual Report and Accounts are available at the following link: https://www.hicl.com/AnnualReport2023
For the year ended 31 March 2023
· Total Shareholder Return1 was 6.3% (2022: 12.8%) delivering long-term value for shareholders against an uncertain macroeconomic environment.
· 1.8p increase in NAV per share to 164.9p (31 March 2022: 163.1p), driven by the portfolio's high (0.8x) inflation correlation, partially offset by a 0.6% increase in the weighted average portfolio discount rate.
· Portfolio return2 of 10.2% (2022: 9.6%), demonstrating the inherent defensive characteristics of the portfolio and the strong inflation linkage.
· 14% uplift in the Directors' valuation3 of the portfolio to £3,772.8m (31 March 2022: £3,311.0m). This increase was largely driven by the £435m of net investment activity in the year.
· This investment activity refined the portfolio and enhanced the Company's ability to generate sustainable long-term earnings, with:
o £545m invested across three assets with an additional investment agreed post year-end in Altitude Infra. These modern core infrastructure investments have added valuable diversification and improved portfolio metrics.
o £108m of disposal proceeds received from QAH, and a further partial disposal of Northwest Parkway agreed post year-end for USD 86m. Both disposals undertaken at a price in excess of carrying value, realising outperformance and providing an alternative source of funding for attractive investments.
· The Company strengthened its balance sheet with an increase in its Revolving Credit Facility (RCF) to £650m expiring on 30 June 2026 and an oversubscribed equity issue of £160m.
· In May 2023 HICL completed a £150m Private Placement, effectively converting existing short-term drawings to a longer maturity, reducing interest rate risk and diversifying the Company's sources of funding.
· The dividend guidance of 8.25pps confirmed for the year to 31 March 20244 and extended to 31 March 20254 at the same level, reflecting the strength of the underlying cash flows. The extended guidance reflects the Board's priority to continue to invest in building a healthy and sustainable long-term earnings base, particularly as its PPP concessions mature and redeem capital.
· HICL has published its Sustainability Report today, with enhanced disclosure and demonstrating significant progress against objectives. HICL's Sustainability Report can be found at: https://www.ircp.com/SustainabilityReport2023
· The outlook for core infrastructure investment remains buoyant, powered by key growth drivers, including decarbonisation and digitalisation. Equipped with a healthy balance sheet, diversified sources of funding and InfraRed's global capability, HICL is well placed pursue its strategy with discipline and ambition.
1. Based on interim dividends paid plus change in NAV per share in the year, divided by opening NAV per share
2. Performance of the portfolio relative to the opening weighted average discount rate
3. The Directors' Valuation comprises the valuation of the investment portfolio under the Investment Basis and the investments committed to by the Company at the reporting period end. The Directors' Valuation is an Alternative Performance Measure
4. 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 year to
31 March 2023
31 March 2022
Profit before tax ("PBT")3
Earnings per share ("EPS")
Dividend per share
1. Includes net foreign exchange gain of £26.3m (2022: £5.5m)
2. Income was £202.3m on an IFRS Basis (2022: £371.8m)
3. PBT was £198.4m on an IFRS Basis (2022: £368.7m)
Net Asset Values
31 March 2023
31 March 2022
Net Asset Value ("NAV") per share
NAV per share after deducting Q4 dividend
Mike Bane, Chairman of the Board, said:
"I am pleased to present another resilient set of results for the Company with NAV growth of 1.8p in the year contributing to a Total Return for shareholders of 6.3%. Against a volatile macroeconomic backdrop, this performance demonstrates the portfolio's strength and key defensive characteristics.
The Company has delivered on the investment pipeline identified last year and continued its strategy of active asset rotation with accretive disposals. New high-quality investments spanning modern core infrastructure sectors add valuable attributes to the portfolio and, importantly, support long-term cash and earnings as HICL's PPP concessions mature and redeem capital. This reflects the Board's commitment to position the Company to deliver a sustainable dividend and compelling total return over the long term."
Edward Hunt, Head of Core Income Funds at InfraRed Capital Partners, HICL's Investment Manager added:
"The delivery of NAV growth against a volatile backdrop demonstrates the defensive characteristics of core infrastructure alongside the benefits of expert portfolio construction and sound capital management.
High quality acquisitions and accretive disposals in the year, and post year-end, illustrate the role of active management and asset rotation in optimising portfolio construction, enhancing long-term earnings generation and providing alternative sources of funding to the Company.
Infrastructure continues to benefit from powerful growth drivers, including decarbonisation and digitisation, which stand to benefit existing investments and underpins long-term demand for infrastructure development. HICL is well placed to pursue its strategy in a range of market conditions, supported by its diversified portfolio and robust balance sheet."
I am pleased to present another resilient set of results for the Company against a volatile macroeconomic backdrop.
HICL's expertly diversified portfolio of essential core infrastructure assets has again demonstrated its defensive characteristics, delivering a Total Shareholder Return1 for the year of 6.3% and a portfolio return2 of 10.2%.
HICL continues to deliver long-term value for shareholders, despite the current macroeconomic and financial conditions. Inflation reached its highest level in over 30 years across HICL's core geographies, resulting in increased interest rates and significant financial market volatility. Cash flows from the Company's diversified portfolio benefit from high inflation correlation and robust capital structures with limited sensitivity to higher financing costs. Proactive management of the Company's debt facilities and accretive share issuance in the year ensured that HICL maintained a solid balance sheet position throughout.
The Board and HICL's Investment Manager, InfraRed Capital Partners ("InfraRed"), remain focused on the active management of portfolio composition, with a clear strategy to markedly increase asset life and future earnings generation within the portfolio, such that HICL remains well positioned for the longterm as its PPP concessions mature and redeem capital. Targeted acquisitions and disposals in the year have contributed significantly to this strategy; effectively recycling capital, improving diversification and introducing highly attractive asset characteristics into the portfolio.
Financial performance in the year to 31 March 2023 has been resilient, with Net Asset Value ("NAV") growth of 1.8p per share to 164.9p. The return from the portfolio was 10.2% (March 2022: 9.6%), outperforming the Company's expected return of 6.6% for the period (the Company's weighted average discount rate as at 31 March 2022).
NAV growth in the year was primarily driven by the impact of higher actual and forecast inflation on the Company's cash flows. HICL's strong inflation correlation of 0.8x serves to protect investors' capital in higher inflationary environments such as those experienced over the past 12 months. Strong inflation correlation is a deliberate part of portfolio composition and its positive effect more than offset the associated impact of higher long-term government bond yields in the year, which saw the portfolio's weighted average discount rate increase from 6.6% to 7.2%.
A more detailed explanation of the portfolio's valuation and discount rate movements over the past year is given in the Valuation of the Portfolio section of HICL's 31 March 2023 Annual Report.
Business model in action
HICL delivers value by investing in and actively managing high-quality core infrastructure assets in attractive sectors and geographies (for more information see HICL's core infrastructure framework). Societal demand for new infrastructure remains strong, due to ageing assets and demographic shifts, and is being driven by the powerful megatrends of digitalisation and decarbonisation. These transformative forces present significant opportunities for HICL to invest in attractive sectors, where investments offer a core infrastructure risk profile, stable income and the prospect of long-term capital growth. Further discussion on the core infrastructure market can be found in HICL's 31 March 2023 Annual Report.
As HICL carefully navigates this evolving core infrastructure landscape, the Board is confident in InfraRed's proven ability to identify and capitalise on attractive opportunities that will generate long-term value for our shareholders.
The attractive attributes of modern core infrastructure are evident in the Company's acquisitions during the year, which span the electricity transmission, communications and transport sectors. Together, these investments have increased the weighted asset life and inflation correlation of the portfolio, offer predictable income under regulated and contracted frameworks, and have significant growth potential through their strategic positioning with exposure to the powerful growth drivers of the modern economy.
Acquisitions in the year have significantly contributed to our strategy to futureproof HICL's investment proposition, considering the maturity profile of the Company's PPP concessions. Since HICL's first non-PPP investments in early 2016, the Company has materially increased its weighted average asset life to 32 years (Sept 2015: 21 years), increased the portfolio's inflation correlation to 0.8x (Sept 2015: 0.6x), and substantially increased the long-term forecast investment valuation to £2.4bn in 2050 (Sept 2015: £nil in 2050).
Maintaining a strong balance sheet in the current volatile market environment is crucial. During the year, the Company demonstrated its ability to raise funding across both debt and equity markets to fund its new acquisitions:
§ In July 2022 HICL activated a £330m accordion to its existing £400m Revolving Credit Facility ("RCF");
§ in July 2022 £160m was raised via an oversubscribed and NAV accretive share issue;
§ in March 2023 the RCF was renegotiated at a higher level (£650m) and with a longer tenor (three years) to 30 June 2026, maintaining the same margin; and
§ in May 2023 HICL completed a £150m Private Placement, effectively converting existing short-term drawings to a longer maturity, reducing interest rate risk and diversifying the Company's sources of funding.
The use of selective disposals as a further source of funding was demonstrated by the sale of Queen Alexandra Hospital (which completed in May 2022) and the partial sale of Northwest Parkway (which was announced after the year-end), both in excess of their holding value. This accretive recycling of capital not only provides an additional source of funding to pursue new investments but improves key portfolio metrics, and supports the Directors' Valuation.
The Board is pleased to reconfirm the dividend guidance of 8.25pps for the year to 31 March 20243, and to extend that guidance out for the year ending 31 March 20253 at the same level of 8.25pps. In reaching this decision, the Board recognises the positive impact of inflation on the Company's portfolio and its cash flows; but also the need to protect the longer-term interests of shareholders and futureproof HICL's investment proposition.
Since the Company's IPO, HICL's investment strategy has underpinned a compelling total return proposition, of which the dividend has constituted a significant element. HICL's shareholders have long been 'ahead of the curve', enjoying the highest cash dividend in the immediate core infrastructure peer group for the best part of 20 years. This has been delivered notwithstanding the specific challenges of recent years (e.g. the Carillion liquidation and Covid-19) and the effects of proactively reshaping the portfolio beyond PPP assets to capture longer-term cash flows with greater growth, which tend to initially provide lower yields.
The portfolio's ability to capture inflation, principally in the NAV, has been a defining benefit for investors over the year and has provided significant protection against a higher interest rate environment. Although there is a contractual lag before this inflation increases distributable cash in a significant way, the benefit compounds over time and has significantly enhanced the portfolio's cash flow and earnings profile over the long term. Additionally, those specific assets which have seen their distributions temporarily constrained are expected to contribute to cash flows increasingly in time, as are those newer investments with lower initial yields which will serve to bolster dividend cover. Increasing cash generation from the portfolio, coupled with a more enduring platform for long-term earnings generation, supports the Board's ambition to resume dividend growth in due course.
HICL invests in essential infrastructure assets that over 20 million people worldwide use and depend on in their day-to-day lives. The Board recognises that this confers a responsibility to actively contribute to the 'social' component of the ESG framework, and utilises this lens in the development of the Company's sustainability strategy. I am pleased to also see the progress made in this area by the Investment Manager, who through their Portfolio Impact team surveyed 61 clients from HICL's portfolio to gain a deeper insight into asset-specific challenges and satisfaction levels. These responses will flow directly into both targeted and scalable initiatives to deliver improved social outcomes. A more detailed explanation of InfraRed's sustainability initiatives is given in the Investment Manager's Report.
To consistently meet sustainability reporting expectations and offer accountability to investors requires continuous improvement. Last year InfraRed launched a data collection process to ascertain the greenhouse gas emissions associated with HICL's entire portfolio, selecting 2019 as the base year to avoid Covid-19 distortion. The Company has now published its first 'live' year of portfolio emissions data, covering 100% of the portfolio and providing investors with tangible data that we can look to improve on going forward. To sit alongside this disclosure, HICL has also published new net zero targets for the portfolio, plotting the path to decarbonising the portfolio by 2050.
The Company's portfolio-wide annual ESG survey has been expanded again this year, with 95 questions used to capture greater amounts of data. This has enabled HICL to report as an Article 8 fund under the EU's Sustainable Finance Disclosures Regulation ("SFDR"). Improved data collection and reporting is also a key component of the Company's Task Force on Climate-related Financial Disclosures ("TCFD") disclosure, which HICL has now been undertaking in full for the past three years.
An in-depth review of the Company's and Investment Manager's sustainability performance and ambitions can be found in HICL's standalone Sustainability Report, available on the Company's website under Reports & Publications.
In line with the UK Corporate Governance Code, after nine years on the Board, Frank Nelson will step down in July 2023. Frank was appointed to the Board in 2014 and has served as Senior Independent Director for seven years. I would like to thank Frank for his unwavering support and valued contribution to the Company.
Kenneth Reid will succeed Frank as Senior Independent Director in July 2023, subject to re-election at the 2023 AGM.
The Board recognises the significance of having a diverse range of views and experiences to support improved decision-making. The Board composition complies with the recommendations made by the Hampton-Alexander and Parker Reviews as well as the FCA's Listing Rules, as applicable to closed-end investment companies. Further information can be found in the Report of the Directors - Diversity Policy.
HICL continues to operate in an unpredictable macroeconomic and geopolitical environment. Financial markets remain volatile, and the level and timing of peak inflation and interest rates remains uncertain. Against this short-term outlook, the Company's own valuation assumes a significant decrease in inflation over the coming year, with HICL's UK RPI forecast returning to 2.75% from April 2024. In isolation, were outturn inflation to be higher than assumed, this would have a positive impact on the Directors' Valuation.
InfraRed continues to see strong demand and robust pricing for high-quality core infrastructure assets, proven by HICL's recent disposal, activity across other InfraRed-managed funds, and observed market data points. These asset realisations also provide an important alternative source of capital outside of equity and debt markets and enable continued refinement of HICL's portfolio. Notwithstanding this, the shift in macroeconomic conditions has negatively impacted listed market valuations across real assets and is likely to reduce the Company's access to equity capital markets in the short term.
Looking further ahead, the outlook for the core infrastructure asset class remains buoyant, underpinned by the growth drivers of decarbonisation and digitalisation combined with the growing need to enhance ageing infrastructure. Equipped with a healthy balance sheet and multiple sources of funding, HICL is well placed to continue navigating the evolving core infrastructure landscape with discipline and ambition, delivering sustainable long-term income and capital growth to its shareholders.
23 May 2023
Chair's Statement footnotes
1. Based on interim dividends paid plus change in NAV per share in the year
2. Performance of the portfolio relative to the opening weighted average discount rate as at 31 March 2022
3. This is a target only and not a profit forecast. There can be no assurance that this target will be met
Investment Manager's Report
In a year of heightened macroeconomic uncertainty, the Company has performed as designed. HICL's strong correlation to inflation more than offset the associated impact of higher discount rates on asset valuations.
The underlying portfolio was resilient, benefiting from expert diversification and sound capital management, and demonstrated improved cash flow generation in the year. InfraRed remains focused on enhancing portfolio composition as reflected in the high-quality acquisitions and selective disposals made in the year. This approach to active management and asset rotation has improved portfolio diversification and significantly enhanced HICL's long-term earnings profile.
The quality of the Company's portfolio, expertise of its Investment Manager and attractions of the core infrastructure market ensures that HICL remains resilient and well positioned to pursue its strategy in a range of market conditions.
The underlying performance of the Company's portfolio was positive for the year ended 31 March 2023, returning 10.2% (9.6% at 31 March 2022)1 which drove a Total Shareholder Return2 of 6.3%, offsetting the increase in the portfolio weighted average discount rate in the year.
Operational outperformance was driven by the portfolio's 0.8x correlation to inflation which has been achieved through disciplined portfolio construction. Actual inflation was ahead of expectations in the year and benefited the Company's cash flows. Further details of the drivers of portfolio performance can be found in the Valuation of the Portfolio section of HICL's 31 March 2023 Annual Report.
Operational performance overview
Operational performance has been in line with the Investment Manager's expectations for the year. HICL's Public Private Partnership ("PPP") portfolio (60% of the Directors' Valuation at 31 March 2023; 66% at 31 March 2022) performed well during the period, benefiting from the inflation linkage built into its availability-based contracted revenues and highly contracted cost base, including fixed debt over the life of the project.
The Company's three largest demand-based investments (17% of the Directors' Valuation at 31 March 2023; 22% at 31 March 2022), together experienced traffic broadly in line with valuation assumptions for the year. Wider economic volatility has not had any material impact on the performance of these investments in the year, helped by their strategically significant locations and entrenched demand.
The operational performance of the Company's largest regulated investment, Affinity Water (7% of the Directors' Valuation at 31 March 2023; 9% at 31 March 2022), was negatively impacted by unusually adverse weather conditions during the year which resulted in increased operating costs and incentive regime penalties. This was offset by the positive impact of actual and forecast inflation, as well as the reflection of Ofwat's final PR24 methodology and early view on the allowed return on capital for the next Asset Management Plan period (2025 - 2030).
Following the completion of Fortysouth (formerly known as Aotearoa Towers) during the year, InfraRed has been working closely with One NZ3 to oversee the transition of the passive infrastructure. Operational and financial performance over the period was in line with HICL's acquisition assumptions. HICL's investment in Texas Nevada Transmission completed after the year-end, and the business has been performing well since the commitment was made in summer 2022. InfraRed's local asset management teams are working closely with both companies to ensure a smooth transition into the HICL portfolio.
Enhanced disclosure on the operational performance of each of HICL's Top 10 assets is set out in HICL's 31 March 2023 Annual Report.
HICL's business model delivering value
The proactive management of the Company's balance sheet and portfolio composition is central to HICL's business model.
Proactive balance sheet management
Disciplined management of the Company's funding position remains a priority. In March 2023, the Company's Revolving Credit Facility (RCF) was renegotiated to increase its capacity to £650m and to extend the tenor to 30 June 2026. This replaced the existing £400m RCF and £330m accordion, which was activated in July 2022 to support the Company's attractive short-term investment pipeline. The new facility, which remains sustainability linked, provides substantial funding resources and sufficient tenor to support the Company's strategy.
In May 2023, HICL issued a £150m Private Placement, further diversifying the Company's sources of capital. Proceeds of the issue will be used to reduce drawings on the Company's RCF, and extend the maturity and reduce the interest rate risk on the equivalent drawings. The maturity aligns with the forecast capital returns from HICL's PPP portfolio to enable the Company to reinvest this capital ahead of time.
HICL's capitalisation was also supported by an accretive equity issuance in July 2022 that raised £160m and was subject to scale back. The continued demand from institutional and retail shareholders demonstrates the support for HICL's strategy and appetite for the key attributes of core infrastructure.
Accretive investment activity
Acquisition and disposal activity in the year served to improve portfolio composition, enhance diversification and contribute significantly to the Company's strategy to increase asset life and long-term earnings generation within the portfolio.
Three high-quality investments were announced in the year, which comprised:
· Fortysouth (New Zealand), a passive mobile tower infrastructure owner with over 1,500 towers. Completed in November 2022 (6% of the Directors' Valuation);
· Cross London Trains ("XLT") (UK), a PPP asset comprising 115 electrified trains. Completed in the period (3% of the Directors' Valuation); and
· Texas Nevada Transmission ("TNT") (US), spanning two distinct electricity transmission systems and over 800km of high-voltage transmission lines. Completion occurred post year-end (6% of the Directors' Valuation).
In addition, in April 2023 the Company announced the acquisition of a stake in Altitude Infra, a leading owner/operator of fibre-to-the-home ("FTTH") in rural France with a total footprint covering over five million households.
These investments were targeted by InfraRed owing to their attractive core infrastructure attributes; essential public assets with contracted and/or regulated cash flows, that enjoy a highly defensive position in their respective markets. This positioning extends to the robustness of the investments' capital structures, with limited refinancing risk, as well as broader protection from the risk of higher interest rates through inflation-linked cash flows and, in the case of TNT, a regulated cost of capital. In an environment of elevated inflation and interest rates, assets that provide these protections are particularly attractive. These investments were delivered through InfraRed's deep global relationships, innovative approach to bidding and strong track record for execution.
The transaction activity further demonstrates the evolution of core infrastructure and the compelling set of investment opportunities arising from modernising global economies. In particular, the megatrends of digitisation and decarbonisation provide tailwinds that are expected to support long-term growth in these recent investments, funded from the assets' existing capital resources.
Alongside accretive investments, asset disposals provide an important lever to optimise portfolio construction, realise NAV outperformance and provide a valuable source of funding for the Company. In the year, HICL completed the disposal of its 100% interest in the Queen Alexandra Hospital ("QAH") PPP project, generating 1.5p of NAV outperformance and £108m of proceeds which were subsequently invested into the accretive acquisitions described above.
Following the year end, HICL executed an agreement to sell 10% of its 33.3% shareholding in the Northwest Parkway for a consideration of USD 86m, achieving a small premium to carrying value. This sale crystallised a 11.0% holding period IRR since the initial investment in December 2016 and a 1.8x multiple on cash invested, demonstrating the continued ability of the Company to deliver capital growth and compound shareholder returns. As well as providing a valuable source of funding, the transaction supported the Directors' Valuation in a period of macroeconomic uncertainty. Not least, the disposal crystallised the significant valuation appreciation since acquisition to effectively rotate capital and optimise HICL's diversification by sector, geography and revenue type.
Specialist asset management
InfraRed's dedicated team of specialist asset managers is key to the delivery of investment performance through the investment lifecycle. The proficient onboarding of new acquisitions has been a critical asset management activity in the year, delivered via InfraRed's asset management platforms out of London, New York and Sydney.
InfraRed's long track record of successfully delivering assets through construction was demonstrated in the period. On 1 July 2022, Paris-Saclay University commenced operations in line with the agreed availability date, marking the conclusion of a four-year construction period. Several key milestones were also achieved at Blankenburg Tunnel, with works expected to complete on schedule in 2024, notwithstanding supply chain pressures linked to the war in Ukraine.
Broader active management by InfraRed of physical asset condition across the PPP portfolio continued over the year. This included proactive leadership of the delivery of remediation works where necessary, including identified construction defects. The value of this work was demonstrated at Pinderfields and Pontefract Hospitals, where commercial agreement to deliver a major programme of defect remediation works enabled the resumption of shareholder distributions in the year and de-risked the future cash flows from the project.
Extensive collaboration with project partners and wider asset stakeholders is also key to the effective resolution of broader industry issues. The Investment Manager maintains its position as a member of the Infrastructure and Project Authority's ("IPA") Project Expiry Working Group as well as the IPA's Net Zero Working Group. At an asset level, InfraRed's dedicated Portfolio Impact team and strategy facilitates greater collaboration with clients and other key stakeholders, while delivering for local communities. More detail is set out in HICL's 2023 Sustainability Report.
NAV per share increased by 1.8p over the year to 164.9p at 31 March 2023 (31 March 2022: 163.1p).
The movement in the NAV per share in the year was largely attributable to the portfolio's strong inflation correlation. The positive portfolio performance was offset by the valuation impact of an increase in the weighted average portfolio discount rate to 7.2% at 31 March 2023 (6.6% at 31 March 2022). The weighted average discount rate was increased to recognise elevated government bond yields throughout the jurisdictions in which HICL invests, as central banks increased benchmark rates in reaction to high levels of inflation. There was no material impact to financial performance from rising interest rates. Overall, HICL's portfolio company gearing, which stands at 66%, is predominantly fixed-rate and the Company has limited sensitivity to rising interest rates (see NAV sensitivity chart on page 50 of HICL's 31 March 2023 Annual Report).
The Board's extended dividend guidance has been developed with the full support of the Investment Manager. Significant strides have been made in recent years to diversify, and extend, the Company's revenue streams through both acquisitions and disposals. These activities have sought to strike an appropriate balance between maintaining HICL's high dividend (in relative terms), prioritising capital preservation and building an enduring platform for long-term NAV appreciation and dividend growth.
To date this strategy has been carried out effectively. Since HICL acquired its first non-PPP investments in early 2016, the Company's weighted average asset life has increased by over 50%, while inflation correlation has increased by over 30% to 0.8x over the same timeframe. The latter has served to provide significant protection to investors over the past year, offsetting the negative impact of higher interest/discount rates on the portfolio valuation while also considerably enhancing HICL's future earnings and cash flow profile. All the while, the Company has continued to pay out the highest dividend in the core infrastructure peer group.
Short-term distributable cash continues to recover, as reflected in the further increase in dividend cash cover (1.03x before profits on disposals), and HICL's asset life is now the highest in its history. Nevertheless, this period of consolidation remains in progress and accordingly InfraRed supports the decision to maintain the dividend at 8.25pps for the year ending 31 March 2025. The dividend is a material component of HICL's total return profile which, when coupled with high inflation correlation, the long-term visibility of portfolio cash flows and potential for NAV growth, provides a compelling investment proposition for shareholders.
As at 31 March the Company's investment entity subsidiary, IILP, was £219m drawn on its RCF, with £16m of short-term commitments at that date. Following year-end transactions, including the completion of TNT, the completion of Altitude Infra, the agreed partial disposal of NWP, the Private Placement proceeds and the expected investment in the Hornsea II OFTO, the Company is expected to have drawn c.£360m on its RCF.
Further information on the investment valuation and financial performance can be found in Valuation of the Portfolio section of HICL's 31 March 2023 Annual Report, and the Financial Review section of HICL's 31 March 2023 Annual Report.
The Board continues to deliver its succession plan, with Frank Nelson, HICL's Senior Independent Director (SID), planning to step down in July 2023. Frank has shown steadfast commitment to the Company over the nine years of his tenure, and we thank him for his significant contribution.
At the Investment Manager level, Keith Pickard stepped down from the HICL Investment Committee upon his retirement from InfraRed in March 2023. In his stead, Helen Price, CFO for HICL and InfraRed, joined the HICL Investment Committee in July 2022.
HICL's portfolio has an important social impact. By facilitating the delivery of essential services in a socially responsible manner, the Company's underlying assets contribute to many of the UN SDGs and deliver an inherent social good. However, a genuine social contribution requires going beyond the reliable provision of infrastructure. To that extent, InfraRed has created a dedicated Portfolio Impact team and strategy which aims to drive positive social outcomes for local communities and to enhance relationships with public and private sector clients.
During the year, InfraRed published its net zero progress report setting out interim targets for all funds, incorporating a proportion of HICL's portfolio which is aligned or aligning to net zero. Within this framework, HICL has disclosed its own interim targets, and the entire portfolio is expected to align with InfraRed's pledge of achieving net zero by 2050 or earlier.
Supporting these initiatives and in line with HICL's active sustainability strategy, the Investment Manager has achieved key milestones in data collection and disclosure in the year for the Company. InfraRed's expanded annual ESG survey has enabled HICL to expand its suite of sustainability metrics and targets to include all mandatory PAI4 indicators under the EU's SFDR regime, an important part of the Company's wider disclosure as an Article 8 fund.
Sustainability Highlights are provided in HICL's 31 March 2023 Annual Report. Full details are set out in the Company's 2023 Sustainability Report, available on the HICL website.
HICL's risk appetite statement, approach to risk management and governance structure are set out in Risk and Risk Management of HICL's 31 March 2023 Annual Report.
The Investment Manager's view on the performance of key risks in the year is set out below.
Political and regulatory risk
Geopolitical risk was elevated in the period, reflecting the continuing war in Ukraine. The Company is not directly exposed to the region, either via its investment portfolio or its shareholder register. The secondary impacts of the conflict, including supply chain disruption, increased energy costs and materials inflation have had a limited impact on a subset of projects during the period, with risks to equity mitigated through contractual pass-through mechanisms.
Political risk also manifested in the UK, with two changes of Prime Minister in the year. The political situation has since stabilised, with the next general election to be held no later than January 2025. The broader need for infrastructure procurement enjoys bipartisan political support, though specific areas of policy focus undoubtedly vary. The Investment Manager continues to judge UK political risk as low. Notwithstanding that, the rationale for portfolio diversification, including across clients, sectors and countries, remains strong and is a key feature of HICL's offering and strategy.
The process whereby PFI projects revert to public ownership is expected to gather momentum over the next decade. Ensuring the smooth transition of assets over time is therefore a prominent issue for all PFI stakeholders, public and private sectors alike. InfraRed enjoys representation in the IPA's dedicated working group on this project, as well as the IPA's equity sponsor steering group, and a HICL asset participated in an IPA-sponsored mid-life contractual review in the year. The Investment Manager launched its own rolling programme of handback preparedness reviews, which focuses initially on the 29 projects due to be handed back in the next ten years (representing 11% of the Directors' Valuation at 31 March 2023). This exercise will guide InfraRed's planning and asset management design around this risk.
There continue to be risks inherent in long-term partnership frameworks, particularly in the context of broader operating and financial pressures across the UK public sector. In specific cases this has resulted in more adversarial forms of contract management, particularly in a subset of the Company's UK healthcare projects. Though this remains immaterial to the portfolio, the risk for further instances of this behaviour exists, including the non-payment of contracted revenues, which could pose a risk to the Company's cash flow.
The Company has six assets classified as being subject to regulatory oversight, though the nature and extent of this varies significantly across the assets. Notably, Affinity Water is approaching a periodic price review by Ofwat, the UK water regulator in 2024 (PR24) which is discussed further in the Top 10 assets - Operational Review, located in the 2023 Annual Report. The Investment Manager notes regulatory and political overtures regarding historic under-investment in the sector and the potential for a more penal operating regime from 2025 onwards. InfraRed enjoys a productive dialogue with Ofwat, plays an important role in relevant industry forums and believes that this risk is reflected appropriately in the Directors' Valuation.
Demand risk and consumer behaviour
The acute risk posed by Covid-19 travel restrictions on HICL's demand-based assets has significantly reduced. This has enabled a greater degree of visibility over potential long-term fluctuations to usage patterns, driven by factors such as shifting working patterns as a result of Covid-19 and the decarbonisation of transport. An estimate of this impact has been incorporated into the long-term revenue forecasts for Northwest Parkway and HS1. Risk remains that current demand forecasts do not accurately reflect shifts in usage patterns for HICL's demand-based assets. The strategic positioning, long traffic histories and entrenched demand enjoyed by HICL's demand-based assets mitigates this risk.
The returns from HICL's core infrastructure portfolio are significantly positively correlated to inflation at 0.8x over the long term. Recognising the current high inflationary environment, NAV and cash flow sensitivities have been calculated. Where inflation is higher than HICL's valuation assumptions by 3% for the next three years, NAV would increase by 10.5p per share.
Discount rates used to value core infrastructure assets did not fully reflect the significant decrease in risk-free rates observed over the last decade, serving to increase the implied equity risk premium to historically high levels. This anticipation of a normalisation of the interest rate environment insulated the portfolio valuation from the full impact of the volatility of risk-free rates. Notwithstanding this, HICL increased its weighted average discount rate by 60bps over the year. The current implied equity risk premium of 3.5% remains appropriate and commensurate with HICL's risk positioning and long track record of delivering for shareholders.
Market and outlook
During a period of heightened geopolitical and macroeconomic uncertainty, the Company's portfolio has again demonstrated its resilience. Volatile periods such as this serve to underscore the importance of the disciplined portfolio construction and expert diversification that underpin HICL's continued ability to deliver long-term outperformance.
The Company is well positioned to continue delivering its strategy. HICL's strong inflation linkage, prudent approach to managing its balance sheet and established track record of delivering yield and capital growth, ensure that HICL remains a compelling all-weather investment and a valuable diversifier for investor portfolios.
InfraRed continues to identify and pursue opportunities to manage portfolio composition and improve key portfolio metrics through highly selective acquisitions and disposals. In this task, InfraRed remains focused on ensuring that HICL is well positioned for the future as its PPP concessions approach their capital redemption phase. This necessitates proactive management, and careful consideration of the relative merits of short-term yield as against an enhanced longer-term earnings profile, such that HICL continues to deliver its compelling investment proposition for decades to come.
The Company's vision, to deliver strong social foundations, connect communities and support sustainable modern economies guides HICL's investment ambition. This vision connects with powerful megatrends of digitalisation and decarbonisation (see Infrastructure Market section in HICL's 31 March 2023 Annual Report) which continue to drive infrastructure development and provide significant opportunity for investment. Strong investment discipline, aided by HICL's core infrastructure framework, and InfraRed's differentiated capability to source opportunities, stand the Company in good stead to deliver its strategy.
HICL has a portfolio of diversified assets with attractive core infrastructure characteristics, in a sector buoyed by powerful growth drivers. Together these underscore the compelling nature of HICL's investment proposition today and into the future.
Investment Manager's Report footnotes
1. Performance of the portfolio relative to the opening weighted average discount rate
2. Based on interim dividends paid plus change in NAV per share in the year, divided by opening NAV per share
3. Formerly known as Vodafone New Zealand
4. Principal Adverse Impact
Responsibility statement of the Directors in respect of the annual financial report
We confirm that to the best of our knowledge:
· the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
· the Strategic Report/Directors' Report includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that they face.
We consider the Annual Report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.
In accordance with Disclosure Guidance and Transparency Rule 4.1.14R, the financial statements will form part of the annual financial report prepared using the single electronic reporting format under the TD ESEF Regulation. The auditor's report on these financial statements provides no assurance over the ESEF format.
By order of the Board
Aztec Financial Services (UK) Limited
23 May 2023
Publication of documentation
The above information is an extract of information from HICL's Annual Report. The Annual Report has been submitted to the National Storage Mechanism and will shortly be available for inspection at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism. It can also be obtained from the Company Secretary or from the Investors section of the Company's website, at www.HICL.com. A direct link to the PDF of the Annual Report is also included here: https://www.hicl.com/AnnualReport2023