22 May 2024
HICL Infrastructure PLC
ANNUAL RESULTS FOR THE YEAR ENDED 31 MARCH 2024
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 2024. The Annual Report and Accounts are available at the following link: https://www.hicl.com/AnnualReport2024
Highlights
For the year ended 31 March 2024
| · | The Company’s NAV per share decreased by 6.7p over the year to 158.2p at 31 March 2024, principally driven by the increase in the portfolio’s weighted average discount rate to 8.0%. | |
| · | New dividend guidance of 8.35pps for FY 20261 and reaffirmed guidance of 8.25pps for the year to 31 March 20251. The return to dividend growth reflects the Board’s confidence in HICL’s future distributable cash flow and long-term earnings profile. | |
| · | Significant progress made on the Company’s strategy with a combined £736m of accretive transactions announced in the year: | |
| o | £509m of asset divestments, at a weighted average 11% premium to carrying value, adding c. 2.5p to HICL’s NAV per share; and | |
| o | £227m of targeted investments in three assets, adding c. 0.7p to NAV per share. | |
| · | Evidenced the robustness of the Company’s NAV by selling 13.5%2 of the portfolio at or above carrying value and covering a range of sectors and geographies. | |
| · | Sales proceeds from the divestments enabled the Company’s Revolving Credit Facility (RCF) to be repaid in May 2024, down from a peak of £494m in April 2023 and a £50m share buyback programme. | |
| o | The Board believes that HICL remains materially undervalued and therefore the risk-adjusted value of investing in HICL’s own portfolio is compelling. | |
| · | Published HICL’s 2024 Sustainability Report, which can be found at: https://www.hicl.com/SustainabilityReport2024 | |
| · | The outlook for the Company is positive and the portfolio continues to perform well in a challenging macroeconomic environment. Active management during the year has provided HICL with the financial strength and flexibility to continue to execute its strategy and deliver an attractive investment proposition for HICL shareholders over the long-term. | |
1. Expressed in pence per Ordinary Share for the financial year ending 31 March. This is a target only and not a profit forecast. There can be no assurance that this target will be met
2. Calculated based on the Directors’ Valuation at 31 March 2023
Summary Financial Results
(On an Investment Basis1)
| for the year to | 31 March 2024 | 31 March 2023 |
| Income2,3 | £105.4m | £254.2m |
| Profit before tax (“PBT”)4 | £30.6m | £198.5m |
| Earnings per share (“EPS”) | 1.5p | 9.9p |
| Dividend per share | 8.25p | 8.25p |
| 1. The Investment Basis is an Alternative Performance Measure. An explanation of the Investment Basis and a reconciliation to IFRS can be found in the Financial Review on pages 40 to 45 of the 2024 Annual Report. The basis for calculation is the same as prior years. 2. Includes net foreign exchange loss of £9.8m (2023: gain of £26.3m)3. Income was £35.2m on an IFRS Basis (2023: £202.3m)4. PBT was £30.5m on an IFRS Basis (2023: £198.5m) | ||
| Net Asset Values | 31 March 2024 | 31 March 2023 |
| Net Asset Value (“NAV”) per share | 158.2p | 164.9p |
| Q4 Dividend | 2.07p | 2.07p |
| NAV per share after deducting Q4 dividend | 156.1p | 162.8p |
Mike Bane, Chair of HICL, said:
“I am pleased to present yet another resilient set of results for HICL. The significant level of transactions completed over the year has materially reduced gearing and enabled a share buyback programme, whilst enhanced cashflow generation and improved prospects for longer term earnings support a return to sustainable dividend growth.”
Edward Hunt, Head of Core Infrastructure Funds at InfraRed Capital Partners, HICL’s Investment Manager added:
“Underlying portfolio performance was resilient, helping to offset the impact of an increase in portfolio discount rates that reduced NAV overall. Delivering a portfolio return of 9.0% in a challenging environment demonstrates the robust nature of the Company’s investments and InfraRed’s active management approach. This was strongly supported with £736m of accretive asset rotation in the year, with over £500m of disposals achieving an average 11% premium to carrying value. This activity improved key portfolio metrics, captured value from market dislocation and supports the Company’s ability to deliver long-term income and capital growth for shareholders.”
Chair’s Statement
I am pleased to present resilient annual results for HICL. The significant level of transactions completed over the year has materially reduced gearing and enabled a share buyback programme, whilst enhanced cash flow generation and improved prospects for longer-term earnings support a return to sustainable dividend growth.
With the uncertain macroeconomic backdrop persisting, the Board and Investment Manager prioritised balance sheet management and disciplined capital allocation in the year. The acceleration of HICL’s (HICL Infrastructure PLC and its subsidiaries, defined as “HICL” or “the Group”)1 strategic asset disposal programme, generating over £500m of proceeds, will enable the complete repayment of HICL’s Revolving Credit Facility (“RCF”) and the launch of a £50m share buyback. These are responsible, long-term decisions which have created value and demonstrate the Board’s approach to capital allocation.
HICL’s diversified portfolio of high-quality core infrastructure assets is, by design, substantially insulated from market volatility and performed in line with expectations during the period. Despite this, the Company’s2 shares have traded at a significant discount to their Net Asset Value (“NAV”). The Board and Investment Manager have been aligned in their view that sustained transaction activity is fundamental to demonstrating the robustness of the Company’s valuation. With this in mind, HICL disposed of nine assets, all at or above carrying value and representing 13.5% of the opening investment portfolio by value. The most recent was Northwest Parkway in February 2024 at a 30% premium to its most recent valuation. These transactions reinforce the Board’s conviction that the Company’s stock remains materially undervalued.
The share price at 31 March 2024 implies a long-term expected return from the portfolio of 8.9% p.a. net of costs, representing a 4.8% implied equity risk premium which has widened by 60bps since the Company’s interim results at 30 September 20233. The Board believes this represents compelling risk-adjusted value, as demonstrated by its commitment to undertake up to £50m in share buybacks over a 12-month period.
Financial performance
HICL’s NAV per share at 31 March 2024 was 158.2p (March 2023: 164.9p). This resilient result was underpinned by the underlying return from the portfolio of 9.0% (March 2023: 10.2%), which exceeded HICL’s weighted average discount rate of 7.2% as at 31 March 2023. This outperformance was offset by the effects of macroeconomic assumptions, particularly increased discount rates, which resulted in earnings per share for the year of 1.5p (March 2023: earnings of 9.9p). Total Shareholder Return (“TSR”) was 1.0%4 (March 2023: 6.3%).
The primary driver of the decrease in NAV per share in the year was an 80bps increase in the weighted average discount rate used to value the portfolio, reflecting increased long-term government bond yields in HICL’s key markets. This was materially offset by higher near-term forecast inflation rates as well as profitable transaction activity in the year.
A more detailed explanation of the portfolio’s valuation and discount rate movements over the year is given in the Valuation of the Portfolio section, starting on page 46 of the full Annual Report linked above.
Business model in action
Accretive asset rotation has long been a key component of HICL’s differentiated strategy, with 26 disposals contributing over 10.1p to NAV per share since its IPO in 2006. During the year, the Board and Investment Manager accelerated HICL’s disposal programme across a range of sectors and geographies generating over £500m in cash proceeds. This decisive action enabled HICL to self-fund portfolio evolution, repay the RCF and launch a £50m buyback programme.
The combined £736m of transactions announced during the year have contributed c.3.3p to HICL’s NAV per share, improved portfolio composition and contributed positively to key portfolio metrics.
More information on these transactions can be found in the Investment Manager’s Report starting on page 20 of the full Annual Report linked above.
Portfolio evolution
HICL’s strategic approach to portfolio construction underpins its ability to deliver an attractive investment proposition for decades to come. Careful and considered transaction activity in recent years has deliberately extended HICL’s revenue streams, introducing assets positioned to capture real growth and to balance the increasing maturity of the Group’s PPP concessions.
This strategic evolution is now reflected in HICL’s asset base: mature shorter-life assets providing a strong yield (“Yielders”), complemented by assets with longer asset life, stronger inflation correlation and greater growth potential (“Growers”). HICL’s Yielders deliver a forecast 10-year cash yield of c.10% against a weighted average life of 14 years, contrasted with HICL’s Growers which are forecast to deliver a 10-year growth rate of 7% p.a. and benefit from a weighted average asset life of 48 years. The combination of these two asset groups provides a robust and enduring earnings platform from which the Company expects to deliver dividend and NAV growth for shareholders over the long term.
Return to dividend growth
The Board reconfirms the dividend guidance of 8.25pps for the year to 31 March 2025, and is pleased to issue new dividend guidance of 8.35pps for the year to 31 March 2026, signifying a return to sustainable, long-term dividend growth5.
The Board recognises the important role played by the Company’s dividend in delivering its compelling total return proposition, and remains focused on providing investors with an attractive income stream alongside a growing earnings base. This approach requires appropriate balance, over the long term, between distributions to shareholders and reinvestment for future growth.
The impact of high inflation over the past 18 months is increasingly flowing through into higher cash receipts across the portfolio, and is supported by real growth in HICL’s demand-based assets, all of which are now making regular distributions. In addition, the asset rotation undertaken in the year has improved the portfolio’s yield profile. Together this provides the Board with the confidence that dividend cash cover will continue to improve in the coming years and that a growing dividend will be appropriately supported both by cash and earnings over the long term.
The Board will continue to assess the ability for further dividend growth over the coming year, as Affinity Water progresses through its regulatory review.
Sustainability progress
HICL’s critical infrastructure investments form the foundations of societies, economies and local communities. The Group’s assets respond to fundamental socioeconomic needs and provide critical services. Over 35 million people worldwide use HICL’s assets in their daily lives, with the underlying assets employing over 2,300 people directly and thousands more through their supply chains. The Board recognises that positive outcomes for HICL shareholders are intrinsically linked to positive outcomes for the communities served by HICL’s assets.
The Board’s strategy is to improve both the impact and disclosure of HICL’s sustainability approach. Improvements this year have included an investor survey, led by a third party, on HICL’s sustainability approach. HICL received an average rating of 7.8 out of 10 for its ESG disclosures and 7.6 out of 10 for its ESG metrics and targets. The survey also provided valuable perspectives on the evolving landscape of ESG reporting frameworks, and the metrics most commonly used by investors. This information will enable the Company to continue to meet sustainability reporting expectations and offer accountability to investors.
Further information on this shareholder survey, as well as an in-depth review of HICL’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, the highlights of which are on page 36 of the full Annual Report linked above.
Capital allocation
The Board maintains a strong focus on capital allocation. This was evidenced during the year by the acceleration of HICL’s strategic asset disposal programme, the prioritisation of reducing RCF drawings, the announcement of a share buyback programme and the execution of highly selective accretive investments.
Going forward, the Board will continue to apply a highly-disciplined approach to capital allocation, with a suitably high bar for new acquisitions, guided by the relative attraction of further share buybacks.
Outlook
The Board and Investment Manager’s disciplined approach to balance sheet management has provided a platform from which HICL can execute its strategy with flexibility and enhanced financial firepower.
The growth potential in the infrastructure sector, particularly in those areas that support the modern economy, is considered vast. Alongside HICL’s resilient concession-based portfolio, more recent growth-oriented investments enhance the Company’s long-term earnings drivers and provide greater potential for outperformance through active management. I invite you to look at the increased disclosure on the key growth drivers for these assets which are included in the Top 10 assets section starting on page 26 of the full Annual Report linked above.
Driven by the Manager’s proven ability to consistently realise investments at attractive valuations, the Company expects to continue to progress strategic and accretive asset rotation. Prevailing market dislocation is anticipated to provide opportunities to further enhance portfolio construction and generate shareholder value through selective investments, without recourse to equity markets.
HICL’s diversified portfolio of over 100 high-quality, inflation-linked assets reflects the evolution of the core infrastructure market – offering shareholders attractive risk-adjusted value for today, with exposure to the powerful infrastructure megatrends driving the returns of tomorrow.
Mike Bane, Chair
21 May 2024