HICL expanding beyond PPP assets into toll roads

But despite good growth of 10, 43 and 73 per cent over one, three and five years, the trust's net asset value (NAV) is trailing its share price. As a result, the trust is trading at a very high premium to NAV of about 20 per cent, and in August it climbed as high as 27 per cent. HICL came to the market with a tap issue on 19 September with which it raised £113m and helped the premium to fall to its current level.

HICL's high premium is part of a wider trend affecting infrastructure investment trusts, which have been greatly prized by investors for their strong yields and access to inflation-linked assets. The average premium to NAV in the sector has soared to 16.8 per cent, with some analysts warning that infrastructure trusts look expensive when compared with areas such as renewable energy infrastructure trusts.

Despite the premium, the trust's manager Tony Roper says HICL still represents good value for income-seeking investors, particularly those in retirement.

"If you want a 4.5 per cent yield and around about a 4.8 per cent return and you're going to hold the trust for the long term, then yes, [it is fair value]," he says.

But he admits that investor demand is running further ahead than the supply of infrastructure investments that the trust likes investing in.

"Clearly we'd like to manage the premium and keep it appropriate but the only way we can do that is by making further investments," says Mr Roper. "We've been very successful as a team at doing that but it is somewhat harder in the current climate because everybody is searching for the same kind of investment."

Since its launch 10 years ago HICL has been invested in fully operational, public sector infrastructure assets such as schools, hospitals and government accommodation. These projects are typically structured as long-term, availability-based 'concession' contracts under a public private partnership (PPP) model. The projects have the advantage of providing stable and predictable income, often with good inflation correlation.

But with the popularity of PPP assets, coupled with a slowdown in the supply of new projects, the trust's managers need to be very selective about what it buys and how much they pay for it. Harry Seekings, director of infrastructure at InfraRed Capital Partners, the company which manages HICL, says pricing discipline remains key to finding good assets at a reasonable price. As a result, the trust loses auction bids more often than it wins. HICL took part in 12 public auctions over the financial year to 31 March but was only successful in one.

However, the trust is also able to call upon its wide network of infrastructure and public sector contacts to make acquisitions privately. Although finding investments this way is also becoming harder, Mr Roper says the trust is still finding them.

As well as relying more on its relationships, the trust is also widening the type of assets it invests in. In particular, it is considering investments in toll roads and electricity transmission projects which are higher risk than PPP projects.

"We can find good value, accretive assets that are suitable for HICL's investment proposition and which are not going to change its lower risk profile," says Mr Seekings says. "PPP projects are the lowest risk spectrum you can get, although even within PPP there's a range of risk spectrums. The average toll road will be higher up on the risk/reward spectrum than the average PPP project but if you look at the whole spectrum across the infrastructure market [toll roads] are still at the lower end of the risk spectrum."

The key issue is to be aware of how much leverage or debt the projects have.

"Where infrastructure has gone wrong in the past - particularly toll roads - is when people have put too much leverage (debt) in because obviously there is traffic volatility, and if you're over-leveraged and then you get traffic downside, you breach your banking covenants," explains Mr Roper. "That's why capital structure is very important to us, because if we're going to buy one of these assets we want it to withstand the economic cycle."

The trust itself carries no gearing and Mr Seekings says the debt its projects have is confined to the asset, so if there is a problem it does not find its way up to HICL's level.

The trust has also increased its allocation to overseas assets. When we last updated on HICL 89 per cent of its assets were UK based, compared with 84 per cent today. Now 10 per cent of its portfolio is in the European Union countries such as France, Germany and the Netherlands, with 3 per cent each in Australia and Canada. Mr Roper says he will continue to invest abroad where he can find opportunities at good prices and where currency exchange does not make it prohibitive.

Infrastructure spending could receive a boost in the forthcoming autumn statement, but Mr Seekings points out even if the government starts procuring more it will take a few years to see tangible opportunities.

He says: "Just because the government is excited about infrastructure today, it doesn't mean it's going to trickle down necessarily into opportunities for private capital but there is some ground for optimism."

Source: Winterflood and Morningstar, as at 26/10/16, *HICL Factsheet, July 2016

Performance

Source: Winterflood, as at 26/10/16

Top 10 holdings (%) as at 26/10/16

Source: HICL Infrastructure Company 

Sector breakdown (%) as at 18/07/16

Source: HICL Infrastructure Company