HICL manager steps down as trust widens investment mix

Colette Ord, director of investment companies research at broker Numis Securities, does not think the manager change will affect the trust's investment style or performance. "The succession has been in process for a while, so it's not unexpected," she says. "Mr Roper remains involved and HICL will still have access to his expertise and knowledge. And Mr Seekings has been at InfraRed [since 1998]."

The trust has recently reported a strong set of results for the year to 31 March 2017, with a net asset value (NAV) total return of 10.3 per cent, exceeding its long-term total return target of 7 to 8 per cent a year. HICL increased its dividend by 2.7 per cent to 7.65p per share - the 10th year of successive dividend growth. HICL has set a target dividend per share of 7.85p for the year to 31 March 2018, and one of 8.05p for the year after that.

During the year to 31 March 2017, the trust made 10 new and five follow-on investments worth £266.6m. These include a 33.3 per cent equity interest in an American toll road 99-year concession, Northwest Parkway. This is to operate and maintain a 14km section of the four-lane that forms part of the ring road around the city of Denver, Colorado. The trust also invests in a toll road in France.

"[Toll roads] are good because they have long concession lives," says Mr Seekings. "But we have a limited appetite for taking that exposure into the portfolio as HICL's share price is uncorrelated to the wider equity market. The last thing we want to do is start buying lots of investments that are correlated and start affecting the uncorrelated performance."

Last year Investors Chronicle reported that HICL was widening the range of assets it invests in, so that as well as investing in public private partnership (PPP) projects in areas such as schools and hospitals, its portfolio now includes demand-based assets such as toll roads. These assets have revenues that vary with usage, meaning that on average they are higher risk than PPP projects, which typically have a more stable and predictable income.

But with the number of new PPP projects dwindling and competition for existing projects intense, the trust's decision to widen its investment universe makes sense, says Ms Ord.

In May, the trust made its first investment into a regulated asset by acquiring 37 per cent of Affinity Water for £269m. This company supplies water to areas including the home counties and is now the largest of the trust's 115 investments, accounting for 10 per cent of its assets. The trust plans to sell a stake of this investment worth £25m to UK local authority pension fund co-investors. This is being done in the hope that HICL will be able to co-invest in larger acquisitions with them in future and reduce HICL's equity interest in Affinity Water from 36.6 per cent to 33.2 per cent.

"We like regulated assets as they have long lives and great inflation correlation," says Mr Seekings. "Although it is the largest investment, the top 10 holdings account for just over 40 per cent of the portfolio, so it remains well diversified."

HICL's acquisition policy has allowed it to invest in regulated assets such as utilities for many years, but it is only now that its managers consider that the trust has reached a sufficient size to buy them without upsetting the portfolio balance and diversification. It has assets worth £2.4bn.

Despite the new types of asset, PPP projects still make up 80 per cent of HICL's portfolio. And Mr Seekings remains focused on finding assets at the lower end of the risk spectrum, which generate inflation-linked returns.

But Iain Scouller, managing director of investment funds research at broker Stifel, says longstanding HICL investors should make sure they are comfortable with the trust's slightly different profile.

"It has moved things up the risk curve a bit," he says. "Demand-based assets such as toll roads come with economic risk [if the economy slows down their revenues are hit]. With regulated assets there's more political risk: the Labour party is talking about nationalising water companies and the current government is talking about putting price controls on the energy market."

And the large holding in Affinity Water increases company-specific risk.

But the trust's attractive yield of over 4 per cent, and inflation-linked returns remain popular with investors, meaning that HICL trades at a premium to NAV, and sometimes a very high one such as the 17.5 per cent level at time of writing. But its board tends not to issue shares to control the premium as it does not want cash sitting on its balance sheet acting as a drag on returns.

Normally HICL only issues shares to fund acquisitions, after using its revolving credit facility to borrow money. Following the Affinity Water investment, HICL is seeking to raise £205m - or up to £260m if there is demand - to repay the drawn balance on its revolving credit facility. The placing price will be set via a bookbuild process, which will close by 5 June and be issued at a premium to the latest ex dividend NAV of 147p.

HICL Infrastructure

Source: Winterflood Securities as at 24/05/17, *HICL as at 24/05/17, **Association of Investment Companies

Performance

Source: Winterflood Securities as at 24/05/17

Sector breakdown (%)

Source: HICL as at 31/12/16 plus subsequent investments, incl Affinity Water

Geographic Location (%)

Source: HICL as at 31/12/16 plus subsequent investments, incl Affinity Water