Strong year for HICL but premium causes concern

The NAV return was driven by factors including value accretive acquisitions made in the last few years, management of assets and higher valuations of portfolio holdings.

However, share price total return was much higher at 22.5 per cent, leading some analysts to say the valuation looks stretched. The trust's premium to NAV has recently been as high as 20 per cent, although it has dropped to 13.7 per cent.

The trust has indicated that it might not grow its NAV by 15 per cent in its current financial year, especially if it makes no further disposals, although it is confident of meeting its 7 per cent target. HICL tends to hold its investments, although it will sell when it can realise value that may not be delivered by continued ownership, and it thinks the proceeds would be better reinvested.

"Although it would be unrealistic to expect this quantum of returns moving forward, an attractive, sustainable and growing dividend has obvious attractions in a world of low numbers," comments Alan Brierley, director, investment companies at Canaccord Genuity.

For the year to 31 March, HICL paid out total dividends of 7.3p, a 2.8 per cent increase on the previous year and in excess of its target of 7.25p. Dividend cash cover is 1.34 times and the trust has set a new dividend target of 7.45p for the year to March 2016, up from its previous guidance of 7.4p. HICL has grown its dividend each year since launch in 2006.

Mr Briereley says: "We remain comfortable with the current rating and believe the traditional premium/discount investment company valuation model is somewhat antiquated, while we expect a further reduction in the discount rate moving forward."

However, analysts at Oriel say: "HICL has built up a good track record and we like the relatively low level of project-specific risk in the portfolio, with the largest 10 investments accounting for 40 per cent of NAV. [But] with the shares trading around 8p above our fair value we maintain a sell recommendation. The valuation looks stretched."

Taking profits

HICL sold its stake in Colchester Garrison in February for £108.3m, a profit on disposal of £50.6m over its valuation of £57.7m.

Since its financial year-end, HICL has also sold its interest in Fife Schools private finance initiative (PFI) project for a profit after costs of £2.4m.

Asset supply squeeze

Infrastructure assets are increasingly popular while supply in the UK is less, driving up prices and reducing returns. HICL took part in 12 auctions over the year to 31 March 2015 but was only successful in two. "In unsuccessful auction processes, the winning bids were at prices that would not, over the investment period of ownership, have been value accretive," comments the trust's chairman, Graham Picken.

But HICL has been able to make acquisitions via its managers' wide network of relationships. For example, they sometimes go directly to vendors and if they offer a fair price the vendor might not go to auction. Or they acquire stakes from exiting co-shareholders of projects in which HICL already has a partial stake. The trust has also considered assets that some investors consider too small or complex, but which can often provide attractive returns.

Over the year to 31 March, HICL made nine new investments and 10 incremental acquisitions for a total consideration of £221.4m.

But Tony Roper, director at InfraRed Capital Partners, the trust's manager, says the rate of growth in new investments may be slower.

Since the year-end, two incremental acquisitions have been made in respect of Salford & Wigan BSF Schools (Phase 1) and Salford & Wigan BSF Schools (Phase 2), taking HICL's ownership in each to 80 per cent.

Looking overseas

HICL has 100 investments. The UK accounts for 89 per cent of assets but the trust is also looking for new investments in Canada, France, the Netherlands and Australia. It already has investments in the latter three and Ireland.

It is the preferred bidder for an asset in Ireland, and looking at two opportunities in Canada.

HICL focuses on operational social and transportation infrastructure assets such as PFI/PPP/P3 concessions, but has increased its bidding activity for infrastructure assets under construction and these account for 5 per cent of the portfolio. While assets under construction increase portfolio risk, this is only slight and the trust gets an enhanced return from them, according to Mr Roper. And he does not expect the level of exposure to assets under construction to increase a great deal.

Source: Morningstar & *HICL

Share price total return performance (%)

Source: Winterflood, as at 26 May 2015

Top 10 holdings, as at 31 March 2015