HICL Infrastructure: solid performance with a 4.9% inflation-linked yield

Real assets such as infrastructure are one of the best ways to protect yourself against rising inflation with the returns from HICL going up by around 0.8% for every one percent increase in prices.

The three billion pound HICL Infrastructure (LON: HICL) investment trust owns a diversified portfolio of 116 fully operational infrastructure assets spread across the transport, healthcare, education, accommodation and utilities sectors. Almost three quarters by value are located in the UK with the majority being public-private partnerships (PPPs) and the rest consisting of 19% demand-based assets and 10% regulated.

Over the six months to the end of September the trust produced a solid NAV total return of 4.7% including dividends. The quarterly distributions were fully covered by earnings and the board believes it is on track for a fully cash covered dividend of 8.25 pence per share for the year ending March 2022.

A similar pay-out has been reaffirmed for 2023, which gives the shares an attractive prospective yield of 4.9%. Since the IPO in March 2006 HICL has generated a total shareholder return of 8.9% per annum with the dividend having been increased by 35% over the period, which represents a steady level of performance.

Solid portfolio

The PPP assets performed strongly in the last six months as they continued to generate long-term, availability based contracted revenues, although the healthcare component acted as a drag on returns. This part of the portfolio has been returning to more normal and resilient operating conditions, but the recent performance was adversely affected by costs associated with the renegotiation of management service agreements and the rectification of building defects.

HICL’s demand-based assets have experienced a varied recovery from the pandemic with the largest element, the A63 motorway in France remaining resilient despite being partially impacted by the lockdowns and travel restrictions. The Northwest Parkway in Colorado has resumed shareholder distributions as the vaccine rollout enabled activity to pick-up and High Speed 1, the UK’s strategic rail link to Europe, has also started to see an increase in traffic.

The regulated assets mostly consist of the water provider Affinity, which performed in line with expectations. If you are concerned about the ESG side of things it is worth noting the sustainable nature of the assets and the strong, long-term social purpose behind many of them.

Outlook

The board says that demand remains strong for infrastructure assets and that their ability to access less competitive situations, such as partnership-driven opportunities and incremental investments is an important factor. One of the main risks though is that if government bond yields rise in response to higher inflation then discount rates would also be expected to increase leading to lower asset valuations.

Fears along these lines have already prompted an increase in the volatility of the share price in recent months and eroded the premium to NAV that now stands at nine percent, which is pretty typical of where it has been for much of the last decade. Despite these concerns there is still much to like about HICL, as evidenced by Investec’s recent reiteration of their buy recommendation.

The broker believes that the trust’s diversified portfolio of core infrastructure assets is a useful diversifier. They see inflation as a key risk for investors and highlight HICL’s significant inflation-linkage to returns and the trust’s inherent defensive qualities, as can be seen from its long-term performance record.