HICL Infrastructure cash generation in line with forecasts

The FTSE 250 company said public-private partnership projects represented 71% of its portfolio value as at 30 September, with that portfolio continuing to perform in line with expectations:

It said its two projects under construction - Paris-Sud University in France and the Blankenburg Connection in the Netherlands - were making good progress.

The construction of a major variation to the Allenby & Connaught PPP, the Army Basing Programme, was completed during the period, providing accommodation for 4,000 troops that had relocated from Germany.

HICL said its demand-based investments represented 22% of the portfolio value as at 30 September, explaining that its toll roads, the A63 Motorway in France and the Northwest Parkway in the United States, had outperformed against their September valuation assumptions.

In the quarter to 31 December, traffic on the A63 Motorway was 3.4% ahead of forecast, and on the Northwest Parkway it was 5.6% higher than expected.

In January, the investment manager completed a refinancing of the Northwest Parkway, which was achieved two years ahead of forecast, taking advantage of a favourable interest rate environment.

Overall, HICL said High Speed 1 had performed in line with its September valuation assumptions, with total train paths 1.4% ahead of forecasts.

In January, the Office of Rail and Road published its final determination on the five-year business plan for the railway’s Control Period 3.

“There were no significant changes from the draft determination received in September and, as discussed in the interim report, all costs are passed down to the train operating companies so there will be little impact from the overall determination on HS1's financial performance,” HICL’s board said in its statement.

Regulated assets represented 7% of the company’s portfolio value as at 30 September.

As part of the 2019 price review, Affinity Water, which represents 6% of the portfolio’s value as at 30 September, has accepted the final determination from the regulator Ofwat on its business plan for Asset Management Period 7, which runs from April 2020 to March 2025.

“Having a resolution of the process allows management to focus on achieving the challenging operational efficiencies required for AMP7.”

Overall, the final determination moved the key metric of total expenditure towards the proposals made in Affinity Water's final business plan submission in August.

HICL said the investment requirements to meet forecast capital expenditure in the final determination were “significant”, explaining that in order to meet them shareholders had , as set out in the August business plan, agreed to forgo dividends during AMP7.

“Following the final determination, credit ratings agency Standard and Poor's have downgraded the senior secured debt ratings of Affinity Water by one notch alongside downgrades for three other UK water utilities.

“This downgrade was expected and it is not anticipated to negatively impact the value of Affinity Water.”

HICL’s second quarterly interim dividend for the financial year ending 31 March of 2.06p per ordinary share was paid on 31 December, with the interest streaming percentage for the second quarter dividend being 55%.

On 26 February, the company announced a third quarterly interim dividend for the financial year of 2.06p per share, in line with its target guidance.

The interest streaming percentage for the third quarter dividend would be 66%.

“The company remains on track to deliver its target dividend of 8.25p per ordinary share for the financial year to 31 March, and the board reiterates a target dividend of 8.45p per ordinary share for the financial year to 31 March 2021 and 8.65p per ordinary share for the financial year to 31 March 2022.

“The company expects the dividend for the year to 31 March 2020 to be fully cash covered.”

HICL said the next valuation of its portfolio would be as at 31 March, and would be published as part of the company's annual results in May.

As it discussed in its interim report in November, the UK government had indicated that it would not lower the UK corporation tax rate to 17%, as was previously planned.

“If confirmed in the forthcoming March 2020 UK Budget, 19% will be held as an ongoing assumption for the UK corporation tax rate and, all else being equal, would have a negative impact on net asset value per share of circa 1.8p.”

HICL noted that the UK infrastructure market had seen increased activity following the general election result in December, with a “significant easing” of the political risk hanging over the sector.

Its investment manager also noted increased asset pricing in a number of recent eurozone and North American auction processes.

Both of those factors were expected to create downward pressure on the respective UK, eurozone and North American discount rates, which would be positive for the March valuation.

It also said that interest rates continued to be depressed in both the UK and eurozone, and if that persisted, would be reflected in lower long-term deposit rate assumptions, which would be negative for the March valuation.

Following the UK general election, sterling had been pushed higher against all major portfolio currencies, which meant that the foreign exchange gains recognised in the first half of the financial year were broadly reversed by 31 December.

UK and European inflation rates had also been below the investment manager's long-term inflation assumptions, which if maintained, would result in some valuation downside, which would be reflected in the March valuation.

Looking ahead, HICL said its exposure to assets with GDP correlation was currently at its target level, although it would look to make further investments in that market segment in proportion to the growth of the portfolio.

The investment manager was continuing to assess opportunities across the core infrastructure market, seeking opportunities in essential community assets with strong cash flow quality and defensive market positions.

It said its investment pipeline remained healthy, with both greenfield and brownfield public-private partnership opportunities in the UK, Europe and North America, as well as an increase in the attractiveness of selective assets which benefited from high quality revenues from corporate counterparties.

“The decisive outcome of the UK general election has eased some of the immediate political pressure on the infrastructure sector,” said chairman Ian Russell.

“This has been welcomed by the company and shareholders alike, and both new and existing investors demonstrated their support in the company's recent tap issuance.

“Over £117m has been raised to enable accretive acquisitions and the Investment Manager is progressing a pipeline of attractive opportunities.”

Russell said private sector involvement in the “responsible delivery” of infrastructure was bringing “real benefit” to society.

“Through regulation and contractual requirements, the private sector is accountable to key stakeholders for the quality of its delivery.

“As a long-term investor in core infrastructure and steward of community assets, HICL takes seriously these responsibilities to both its investors and society as whole.”

He added that the company was on track to deliver the target dividend for the year ending 31 March of 8.25p per share, with the board “pleased” to reiterate its targets for the following two years of 8.45p and 8.65p per share.

“In the context of market expectations of 'lower for longer' interest rates, HICL's diversified portfolio of infrastructure investments continues to produce an attractive, long-term yield for the company's shareholders.”

At 0833 GMT, shares in HICL Infrastructure were down 2.68% at 167.2p.