Annual Results for the Year Ended 31 March 2024

HICL Infrastructure PLC

22 May 2024

 

22 May 2024

HICL Infrastructure PLC

ANNUAL RESULTS FOR THE YEAR ENDED 31 MARCH 2024

This announcement contains Inside Information.

The Board of HICL Infrastructure PLC ("HICL", or the "Company") announces Annual Results for the Company for the year ended 31 March 2024. The Annual Report and Accounts are available at the following link: https://www.hicl.com/AnnualReport2024

Highlights

For the year ended 31 March 2024

·	The Company's NAV per share decreased by 6.7p over the year to 158.2p at 31 March 2024, principally driven by the increase in the portfolio's weighted average discount rate to 8.0%.
·	New dividend guidance of 8.35pps for FY 20261 and reaffirmed guidance of 8.25pps for the year to 31 March 20251. The return to dividend growth reflects the Board's confidence in HICL's future distributable cash flow and long-term earnings profile.
·	Significant progress made on the Company's strategy with a combined £736m of accretive transactions announced in the year:
	o	£509m of asset divestments, at a weighted average 11% premium to carrying value, adding c. 2.5p to HICL's NAV per share; and
	o	£227m of targeted investments in three assets, adding c. 0.7p to NAV per share.
·	Evidenced the robustness of the Company's NAV by selling 13.5%2 of the portfolio at or above carrying value and covering a range of sectors and geographies.
·	Sales proceeds from the divestments enabled the Company's Revolving Credit Facility (RCF) to be repaid in May 2024, down from a peak of £494m in April 2023 and a £50m share buyback programme.
	o	The Board believes that HICL remains materially undervalued and therefore the risk-adjusted value of investing in HICL's own portfolio is compelling.
·	Published HICL's 2024 Sustainability Report, which can be found at: https://www.hicl.com/SustainabilityReport2024
·	The outlook for the Company is positive and the portfolio continues to perform well in a challenging macroeconomic environment. Active management during the year has provided HICL with the financial strength and flexibility to continue to execute its strategy and deliver an attractive investment proposition for HICL shareholders over the long-term.

1.     Expressed in pence per Ordinary Share for the financial year ending 31 March. This is a target only and not a profit forecast. There can be no assurance that this target will be met

2.     Calculated based on the Directors' Valuation at 31 March 2023

Summary Financial Results

(On an Investment Basis¹)

for the year to	31 March 2024	31 March 2023
Income2,3	£105.4m	£254.2m
Profit before tax ("PBT")4	£30.6m	£198.5m
Earnings per share ("EPS")	1.5p	9.9p
Dividend per share	8.25p	8.25p
1.     The Investment Basis is an Alternative Performance Measure. An explanation of the Investment Basis and a reconciliation to IFRS can be found in the Financial Review on pages 40 to 45 of the 2024 Annual Report. The basis for calculation is the same as prior years.  2.     Includes net foreign exchange loss of £9.8m (2023: gain of £26.3m) 3.     Income was £35.2m on an IFRS Basis (2023: £202.3m) 4.     PBT was £30.5m on an IFRS Basis (2023: £198.5m)
Net Asset Values	31 March 2024	31 March 2023
Net Asset Value ("NAV") per share	158.2p	164.9p
Q4 Dividend	2.07p	2.07p
NAV per share after deducting Q4 dividend	156.1p	162.8p

Mike Bane, Chair of HICL, said:

"I am pleased to present yet another resilient set of results for HICL. The significant level of transactions completed over the year has materially reduced gearing and enabled a share buyback programme, whilst enhanced cashflow generation and improved prospects for longer term earnings support a return to sustainable dividend growth."

Edward Hunt, Head of Core Infrastructure Funds at InfraRed Capital Partners, HICL's Investment Manager added:

"Underlying portfolio performance was resilient, helping to offset the impact of an increase in portfolio discount rates that reduced NAV overall. Delivering a portfolio return of 9.0% in a challenging environment demonstrates the robust nature of the Company's investments and InfraRed's active management approach. This was strongly supported with £736m of accretive asset rotation in the year, with over £500m of disposals achieving an average 11% premium to carrying value. This activity improved key portfolio metrics, captured value from market dislocation and supports the Company's ability to deliver long-term income and capital growth for shareholders."

Chair's Statement

I am pleased to present resilient annual results for HICL. The significant level of transactions completed over the year has materially reduced gearing and enabled a share buyback programme, whilst enhanced cash flow generation and improved prospects for longer-term earnings support a return to sustainable dividend growth.

With the uncertain macroeconomic backdrop persisting, the Board and Investment Manager prioritised balance sheet management and disciplined capital allocation in the year. The acceleration of HICL's (HICL Infrastructure PLC and its subsidiaries, defined as "HICL" or "the Group")¹ strategic asset disposal programme, generating over £500m of proceeds, will enable the complete repayment of HICL's Revolving Credit Facility ("RCF") and the launch of a £50m share buyback. These are responsible, long-term decisions which have created value and demonstrate the Board's approach to capital allocation.

HICL's diversified portfolio of high-quality core infrastructure assets is, by design, substantially insulated from market volatility and performed in line with expectations during the period. Despite this, the Company's² shares have traded at a significant discount to their Net Asset Value ("NAV"). The Board and Investment Manager have been aligned in their view that sustained transaction activity is fundamental to demonstrating the robustness of the Company's valuation. With this in mind, HICL disposed of nine assets, all at or above carrying value and representing 13.5% of the opening investment portfolio by value. The most recent was Northwest Parkway in February 2024 at a 30% premium to its most recent valuation. These transactions reinforce the Board's conviction that the Company's stock remains materially undervalued.

The share price at 31 March 2024 implies a long-term expected return from the portfolio of 8.9% p.a. net of costs, representing a 4.8% implied equity risk premium which has widened by 60bps since the Company's interim results at 30 September 2023³. The Board believes this represents compelling risk-adjusted value, as demonstrated by its commitment to undertake up to £50m in share buybacks over a 12-month period.

Financial performance

HICL's NAV per share at 31 March 2024 was 158.2p (March 2023: 164.9p). This resilient result was underpinned by the underlying return from the portfolio of 9.0% (March 2023: 10.2%), which exceeded HICL's weighted average discount rate of 7.2% as at 31 March 2023. This outperformance was offset by the effects of macroeconomic assumptions, particularly increased discount rates, which resulted in earnings per share for the year of 1.5p (March 2023: earnings of 9.9p). Total Shareholder Return ("TSR") was 1.0%⁴ (March 2023: 6.3%).

The primary driver of the decrease in NAV per share in the year was an 80bps increase in the weighted average discount rate used to value the portfolio, reflecting increased long-term government bond yields in HICL's key markets. This was materially offset by higher near-term forecast inflation rates as well as profitable transaction activity in the year.

A more detailed explanation of the portfolio's valuation and discount rate movements over the year is given in the Valuation of the Portfolio section, starting on page 46 of the full Annual Report linked above.

Business model in action

Accretive asset rotation has long been a key component of HICL's differentiated strategy, with 26 disposals contributing over 10.1p to NAV per share since its IPO in 2006. During the year, the Board and Investment Manager accelerated HICL's disposal programme across a range of sectors and geographies generating over £500m in cash proceeds. This decisive action enabled HICL to self-fund portfolio evolution, repay the RCF and launch a £50m buyback programme.

The combined £736m of transactions announced during the year have contributed c.3.3p to HICL's NAV per share, improved portfolio composition and contributed positively to key portfolio metrics.

More information on these transactions can be found in the Investment Manager's Report starting on page 20 of the full Annual Report linked above.

Portfolio evolution

HICL's strategic approach to portfolio construction underpins its ability to deliver an attractive investment proposition for decades to come. Careful and considered transaction activity in recent years has deliberately extended HICL's revenue streams, introducing assets positioned to capture real growth and to balance the increasing maturity of the Group's PPP concessions.

This strategic evolution is now reflected in HICL's asset base: mature shorter-life assets providing a strong yield ("Yielders"), complemented by assets with longer asset life, stronger inflation correlation and greater growth potential ("Growers"). HICL's Yielders deliver a forecast 10-year cash yield of c.10% against a weighted average life of 14 years, contrasted with HICL's Growers which are forecast to deliver a 10-year growth rate of 7% p.a. and benefit from a weighted average asset life of 48 years. The combination of these two asset groups provides a robust and enduring earnings platform from which the Company expects to deliver dividend and NAV growth for shareholders over the long term.

Return to dividend growth

The Board reconfirms the dividend guidance of 8.25pps for the year to 31 March 2025, and is pleased to issue new dividend guidance of 8.35pps for the year to 31 March 2026, signifying a return to sustainable, long-term dividend growth⁵.

The Board recognises the important role played by the Company's dividend in delivering its compelling total return proposition, and remains focused on providing investors with an attractive income stream alongside a growing earnings base. This approach requires appropriate balance, over the long term, between distributions to shareholders and reinvestment for future growth.

The impact of high inflation over the past 18 months is increasingly flowing through into higher cash receipts across the portfolio, and is supported by real growth in HICL's demand-based assets, all of which are now making regular distributions. In addition, the asset rotation undertaken in the year has improved the portfolio's yield profile. Together this provides the Board with the confidence that dividend cash cover will continue to improve in the coming years and that a growing dividend will be appropriately supported both by cash and earnings over the long term.

The Board will continue to assess the ability for further dividend growth over the coming year, as Affinity Water progresses through its regulatory review.

Sustainability progress

HICL's critical infrastructure investments form the foundations of societies, economies and local communities. The Group's assets respond to fundamental socioeconomic needs and provide critical services. Over 35 million people worldwide use HICL's assets in their daily lives, with the underlying assets employing over 2,300 people directly and thousands more through their supply chains. The Board recognises that positive outcomes for HICL shareholders are intrinsically linked to positive outcomes for the communities served by HICL's assets.

The Board's strategy is to improve both the impact and disclosure of HICL's sustainability approach. Improvements this year have included an investor survey, led by a third party, on HICL's sustainability approach. HICL received an average rating of 7.8 out of 10 for its ESG disclosures and 7.6 out of 10 for its ESG metrics and targets. The survey also provided valuable perspectives on the evolving landscape of ESG reporting frameworks, and the metrics most commonly used by investors. This information will enable the Company to continue to meet sustainability reporting expectations and offer accountability to investors.

Further information on this shareholder survey, as well as an in-depth review of HICL's and Investment Manager's sustainability performance and ambitions, can be found in HICL's standalone Sustainability Report, available on the Company's website under Reports & Publications, the highlights of which are on page 36 of the full Annual Report linked above.

Capital allocation

The Board maintains a strong focus on capital allocation. This was evidenced during the year by the acceleration of HICL's strategic asset disposal programme, the prioritisation of reducing RCF drawings, the announcement of a share buyback programme and the execution of highly selective accretive investments.

Going forward, the Board will continue to apply a highly-disciplined approach to capital allocation, with a suitably high bar for new acquisitions, guided by the relative attraction of further share buybacks.

Outlook

The Board and Investment Manager's disciplined approach to balance sheet management has provided a platform from which HICL can execute its strategy with flexibility and enhanced financial firepower.

The growth potential in the infrastructure sector, particularly in those areas that support the modern economy, is considered vast. Alongside HICL's resilient concession-based portfolio, more recent growth-oriented investments enhance the Company's long-term earnings drivers and provide greater potential for outperformance through active management. I invite you to look at the increased disclosure on the key growth drivers for these assets which are included in the Top 10 assets section starting on page 26 of the full Annual Report linked above.

Driven by the Manager's proven ability to consistently realise investments at attractive valuations, the Company expects to continue to progress strategic and accretive asset rotation. Prevailing market dislocation is anticipated to provide opportunities to further enhance portfolio construction and generate shareholder value through selective investments, without recourse to equity markets.

HICL's diversified portfolio of over 100 high-quality, inflation-linked assets reflects the evolution of the core infrastructure market - offering shareholders attractive risk-adjusted value for today, with exposure to the powerful infrastructure megatrends driving the returns of tomorrow.

Mike Bane, Chair

21 May 2024

1.     HICL Infrastructure PLC and its subsidiaries is defined as either HICL or the Group throughout the Report

2.     HICL Infrastructure PLC, the Company only, is defined as the Company throughout the Report

3.     Based on discount rate, less Ongoing Charges Ratio, adjusted to reflect the share price discount to the NAV using published discount rate sensitivities

4.     Based on interim dividends paid plus change in NAV per share in the year

5.     This is a target only and not a profit forecast. There can be no assurance that this target will be met

Investment Manager's Report

HICL has performed well operationally in the year, with the portfolio well insulated from rising interest rates and benefitting from strong inflation correlation. This solid foundation was supported by the enhancement of the Group's balance sheet and the continued strategic evolution of the portfolio during the year.

These achievements were underpinned by the acceleration of the Group's asset rotation strategy, resulting in over £700m of transactions, including over £500m of accretive disposals and complemented with highly targeted acquisitions. This activity improved key portfolio metrics, strengthened HICL's balance sheet and supported the valuations of the Group's portfolio.

This active management of the portfolio, supported by inflation pass-through and real growth in HICL's demand-based assets, continues to bolster actual and expected growth in distributable cash, enabling the recommencement of sustainable dividend growth from FY26.

With a robust balance sheet, keen investment discipline and a rapidly growing addressable market, HICL is in a strong position to deliver value for shareholders through both income and capital growth over the long term.

Operational Highlights

The underlying return from the portfolio was solid for the year ended 31 March 2024, delivering an underlying return of 9.0% (10.2% at 31 March 2023), ahead of the expected return of 7.2% for the year (as at 31 March 2023) before the impact of changes to reference discount rates and macroeconomic assumptions.

This portfolio outperformance was primarily driven by accretive transaction activity and value enhancement at the asset level, partially offset by lower than forecast inflation in the second half of the year and increased lifecycle costs in the UK PPP sector.

Further details can be found in the Valuation section of this report starting on page 46 of the full Annual Report linked above.

Operational performance overview

HICL's diversified portfolio of high-quality core infrastructure assets performed in line with the Investment Manager's expectations over the year.

The Group's more recently acquired modern economy assets - Fortysouth, Texas Nevada Transmission ("TNT"), Hornsea II OFTO and Altitude Infra - are now fully integrated into the portfolio and are performing broadly in line with their respective business plans.

Affinity Water submitted its business plan to Ofwat in September 2023 as part of the 2024 periodic price review ("PR24") and is due to receive a draft determination over the summer months. As a water only company, Affinity Water has no direct exposure to sewerage services. Financially, Affinity Water goes into PR24 with a robust capital structure, owing to proactive balance sheet management. This has enabled the company to submit a business plan which envisages 32% growth in its regulatory capital value over the next regulatory period of five years, whilst maintaining the lowest bill increases in the sector. Importantly, Affinity Water continues to be well placed to resume shareholder distributions in FY26, further supporting the Group's cash generation and dividend cover forecast.

High Speed 1 ("HS1") recommenced shareholder distributions in the year, driven by the continuing recovery in international train travel following the Covid-19 pandemic. During the second half of the year, three potential new operators announced their intention to utilise HS1 from 2026 to provide competing services to a variety of European destinations.

The possibility of additional international operators was a key attraction of the investment at the time of acquisition; and InfraRed will continue to work closely with the HS1 management team to support greater utilisation of the line. The introduction of one or more new international operators would be expected to result in an increase in revenues, benefitting HS1's valuation.

Enhanced disclosure on the operational performance of each of HICL's Top 10 assets is set out starting on page 26 of the full Annual Report linked above.

HICL's business model delivering value

The proactive management of the Company's balance sheet and portfolio composition is central to HICL's business model.

Investment activity

Consistently improving portfolio composition through accretive asset rotation has been a core part of the differentiated approach since IPO. In that time, the Investment Manager has made over £1bn of strategic asset disposals. This gives HICL a more extensive track record of asset rotation than any of its core infrastructure peers.

In the year, HICL's focus was on disposal activity, which enabled accretive rotation into highly attractive new assets, alongside repayment of the Group's RCF and the announcement of a £50m share buyback programme.

£509m of asset disposals were made during the year, with all realisations made either at or above carrying value. This first-hand transaction experience reinforces the Investment Manager's view that HICL's portfolio remains fundamentally undervalued by public markets given that high-quality, inflation-linked core infrastructure assets continue to attract strong valuations in private markets. Disposals announced during the year:

-  A portfolio sale comprising four UK PPP projects, namely; Queens (Romford) Hospital, Oxford John Radcliffe Hospital, Priority Schools North East Batch and South Ayrshire Schools, in addition to half of the Group's investment in the Hornsea II OFTO, for an aggregate c.£204m, at a modest premium to their combined carrying value;

-  Northwest Parkway (US) a partial disposal of a toll-road in Colorado for $86m, in line with its carrying value;

-  Bradford BSF Phase 1 & 2 (UK), the combined sale of two PPP schools for c.£37m at an 8% premium to its carrying value;

-  University of Sheffield Accommodation (UK), the sale of a concession with demand-based revenues for £18m, in line with its carrying value; and

-  Northwest Parkway (US), the disposal of HICL's remaining stake in the project, with the net proceeds of $232m representing a 30% premium to its carrying value. In combination with the partial disposal completed earlier in the year, the sale of Northwest Parkway crystallised a 13.0% holding period IRR and 2.2x multiple on invested capital since HICL's initial investment in December 2016.

HICL also signed and completed three targeted investments in the year totalling £227m:

-  Altitude Infra (France), the largest independent wholesale fibre network in rural France (3% of the Directors' Valuation);

-  Hornsea II OFTO (UK), the offshore transmission assets associated with the world's largest installed windfarm (2% of the Directors' Valuation); and

-  An incremental investment in A63 Motorway (France), a high-performing toll road the Investment Manager knows well, having initially developed the asset through another InfraRed-managed fund (now 7.9% of the Directors' Valuation).

In combination, the significant transaction activity completed during the year improved the portfolio's yield profile, and was a contributing factor to the Board's decision to guide a return to dividend growth for the Company for the year ending 31 March 2026. This demonstrates the value that can be generated for shareholders through active asset management.

Buyback programme

In March 2024 the Company announced a £50m share buyback programme. The Investment Manager believes that buying back HICL's shares when the share price is at a significant discount to NAV has economic merit, serves as a sign of confidence in the Company, and illustrates the range of levers available to the Board and Manager to enhance shareholder value.

The risk and return proposition available to the Company through buying back its shares will continue to be a key benchmark for future capital allocation decisions.

Specialist asset management

The consistent delivery of investment performance throughout the entire investment lifecycle is only possible through InfraRed's dedicated team of over 30 specialist asset managers, situated across London, New York and Sydney and supported by specialist operating partners in certain sectors and markets. This asset management capability continues to evolve with the investment activities across InfraRed's wider platform, spanning both core and value-add strategies.

Since HICL's IPO, the Investment Manager has successfully delivered 18 construction assets, generating over 5.0p of NAV outperformance. This specialisation was demonstrated again in the year at Blankenburg Tunnel, where final major construction milestones were achieved. InfraRed's strong track record in greenfield, construction stage investments, positions HICL to pursue suitable opportunities in the space as and when they arise.

As long-standing responsible investors in critical infrastructure, InfraRed's active asset management approach is predicated on maintaining appropriate quality, safety and service levels for HICL's clients and end-users. In cases where remediation works are required to address construction-related defects, InfraRed is overseeing delivery of appropriate capital works programmes alongside responsible construction contractors, where relevant. In these cases, it is only by working proactively with our partners to ensure continuity of service for the community, that shareholder value can be protected.

Additional information on asset management initiatives which help to preserve and enhance value across HICL's largest investments is set out starting on page 26 of the full Annual Report linked above.

Financial highlights

HICL's NAV per share decreased by 6.7p over the year to 158.2p at 31 March 2024 (31 March 2023: 164.9p). This reflected an increase in the portfolio's weighted average discount rate from 7.2% to 8.0%, partially offset by higher forecast inflation, higher interest on cash deposits, and positive underlying portfolio performance. Further detail on the approach to valuation can be found in the Valuation section starting on page 46 of the full Annual Report linked above.

The Group issued long-term debt in the year via a £150m Private Placement, diversifying HICL's capital base. The instrument, with 10- and 12-year maturities and an all-in effective interest rate of 5.75%, was sought to responsibly manage a portion of the Group's floating rate exposure at a lower long-term rate, manage the refinancing risk and strategically align the term repayment with expected capital redemptions from the PPP portfolio.

Proceeds from the disposals announced in the year have enabled the Group's RCF to be substantially repaid post-year end, down from £494m at its peak in April 2023, reducing HICL's pro-forma fund borrowing ratio to 7% (31 March 2024: 16%).

Following the completion of the Northwest Parkway sale, the Group's RCF was reduced from £650m to £400m, recognising that its requirements had reduced in this higher interest rate environment. The RCF's expiry date remains 30 June 2026.

Further information on HICL's financial performance can be found in the Financial Review section starting on page 40 of the full Annual Report linked above.

Governance

As part of the Investment Manager's succession plan, Jack Paris officially took over from Werner von Guionneau as InfraRed CEO in July 2023. At the HICL Investment Committee level, Jack replaced Werner, with Chris Gill taking over as Chair of the Committee.

Sustainability

Sustainability is embedded throughout HICL's business model, focused on four key areas where HICL's investments can generate the strongest outcomes: Environment, Communities, People and Governance. InfraRed recognises that providing HICL's shareholders with sustainable, long-term income is intrinsically linked to the delivery of favourable outcomes, across these four pillars, to the communities served by its assets.

HICL has now released its second 'live' year of emissions data, which covers 100% of the portfolio and serves to benchmark progress towards the Group's goal of achieving a carbon-neutral portfolio by 2050¹. InfraRed has developed an action plan which envisages the proportion of HICL's investments anticipated to be aligning, aligned to or at net zero increasing from 25% today to 45% in 2027.

Beyond the portfolio's inherent social contribution through the delivery of essential services, HICL's assets are a source of direct employment for over 2,300 individuals and indirectly support thousands more through the supply chain. To further integrate a sustainability-first mindset into this supply chain, InfraRed has introduced diversity, equity, and inclusion guidelines across portfolio companies, with compliance monitored via the annual ESG survey. In a move towards greater accountability, key Group service providers are now also asked to endorse a code of conduct in addition to self-assessments, enabling more formal oversight of adherence to policies and standards.

Sustainability highlights are provided on pages 36 to 39 of the full Annual Report linked above. Full details are set out in the Company's 2024 Sustainability Report, available on the HICL website.

Risk management

HICL's risk appetite statement, approach to risk management and governance structure are set out in Risk and Risk Management, starting on page 53 of the full Annual Report linked above.

Commentary relating to the Group's key risks is set out below.

Political and regulatory risk

Geopolitics

Geopolitical risk remained elevated, noting the continued unrest in Ukraine and the Middle-East. The Company's portfolio is not directly exposed to these regions. Secondary impacts, including supply chain disruption and inflation, have had a limited impact on a subset of projects during the period, with risks to equity mitigated through contractual pass-through mechanisms.

UK elections

National elections will take place in the UK during the coming financial year, with the inherent potential to shift the policy framework around infrastructure ownership, handback and future procurement.

InfraRed observes broad political consensus on the significant levels of investment needed to upgrade the UK's ageing or outdated infrastructure. This bipartisan support, combined with stretched public sector balance sheets, is expected to provide a framework for constructive discussions between the public and private sectors on the important role that private capital can continue to play in delivering much-needed critical public infrastructure. InfraRed actively contributes to this discussion through its various industry and trade organisation memberships and through direct engagement with both major political parties.

Regulatory determinations

HICL's primary exposure to regulatory risk is through Affinity Water, which expects to receive its PR24 draft determination in June 2024. Recognising that there is uncertainty around the outcome of PR24, InfraRed has collaborated closely with the Affinity Water management team and Ofwat throughout the process and is confident that HICL's valuation of the asset reasonably weighs the risks and opportunities associated with the price review. The Investment Manager also notes the heightened political and regulatory scrutiny of the water sector more broadly, including reports of financial issues affecting certain water and sewerage companies. Affinity Water benefits from a stable capital structure with very little holdco debt, no refinancing requirement until AMP8 (which starts 1 April 2025), and no exposure to sewerage services.

More broadly, InfraRed mitigates this risk by managing regulatory exposures across jurisdictions and regulators. TNT and Altitude Infra both benefit from stable regulatory frameworks which differ considerably from the UK's incentive-based framework.

PFI handback

The acceleration of PPP projects returning to public control is increasingly a key issue for both public and private sectors. InfraRed is a key voice on this issue, actively contributing to the Infrastructure and Projects Authority's (IPA) industry working group focused on this transition, as well as its industry steering group. InfraRed has initiated a systematic programme to review its preparedness for all future project handbacks within HICL's portfolio. HICL has 33 projects scheduled for transfer within the next ten years, which account for 13% of the Directors' Valuation at 31 March 2024. This preparatory work, supported by a specialist third-party adviser, is shaping InfraRed's strategic planning and asset management approach to effectively mitigate this transition risk.

The proactive management of lifecycle spending is an important factor as projects approach handback. PPP projects make up 58% of HICL's portfolio, and lifecycle risk and reward is borne by the project on 59% of these assets. In these cases, InfraRed continues to closely monitor the appropriateness of the lifecycle forecast reflected in each asset's valuation. For the remaining 41% of the PPP portfolio, lifecycle risk is passed down to the facilities management contractor, which is an important part of InfraRed's risk management strategy in relation to handback.

Client relationships

Long-term partnership frameworks inherently carry certain risks, which are heightened by the broader operational and financial challenges facing the UK public sector. In certain sectors, such as healthcare, this pressure can translate into behaviour by specific clients, and their advisers, that could prove adverse to the interests of the PFI, including with respect to service delivery. While these isolated instances have not had a material impact on the overall portfolio to date, these practices increase the risk of dispute, and in extreme cases could lead to reduced or non-payment of contracted revenues, presenting a risk to the Group's cash flow stability.

Macroeconomic risk

The macroeconomic climate continues to weigh on listed market valuations for real assets, including for HICL. Notwithstanding, InfraRed remains confident in the valuation of the portfolio, and has demonstrated the validity of HICL's NAV through multiple disposals in the year across sectors and geographies.

The persistence of the high interest rate environment is likely to limit HICL's opportunities to raise new equity capital in the near future. However, acquisition and disposal activity undertaken during the year has clearly demonstrated InfraRed's ability to progress HICL's strategic objectives without reliance on equity capital markets. If equity markets remain inaccessible for a protracted period, the Investment Manager is confident in its ability to continue to rotate assets to enhance HICL's portfolio and investment proposition.

If inflation continues to fall faster than the Group's projections, there is the risk of downward pressure on cash generation and dividend cover. However, HICL's valuation forecasts remain conservative relative to long-term market expectations, and the impact of short-term variations in inflation on dividend cover is not expected to be material. As part of the process undertaken to recommend a return to dividend growth, the proposed dividend increase has undergone rigorous stress testing against various macroeconomic scenarios, including a rapid return to a low inflation environment.

Market and outlook

HICL has continued to prove its resilience in an uncertain macro environment, underpinned by carefully considered portfolio construction, robust balance sheet management and disciplined transaction activity. Active management during the year has provided HICL with the financial strength and flexibility to continue to execute its strategy and deliver an attractive investment proposition for HICL shareholders over the long term.

InfraRed continues to observe attractive opportunities for HICL to pursue. Conditions across the market for infrastructure assets remain variable and favour experienced investors with deep networks and flexible balance sheets, such as HICL. These attributes enable the Group to identify special situations with favourable competitive dynamics and with outsized returns. In this way, the Group's approach remains highly selective within its core sectors (see the Infrastructure Market section on pages 10-13 of the full Annual Report linked above).

The marginal return threshold for assessing new investments remains high, with the benchmark for new opportunities informed by potential NAV accretion available through additional share repurchases, as well as the contribution to HICL's key portfolio metrics. Funding for such investments will continue to be supported by selective disposals, as appropriate, and where these divestments align with long-term portfolio composition objectives.

HICL's portfolio has been structured to perform in a variety of macroeconomic environments; it has resilient inflation-linked cash flows, largely insulated from higher interest rates and with long-term growth potential. These attributes underpin the Group's long-term earnings base and ensure HICL is well positioned to generate shareholder value through both sustainable income and long-term capital growth.

1.     HICL outlines in detail its transition plan and targets towards a carbon neutral and, therefore, net zero portfolio by 2050 on pages 15 to 19 of its 2024 Sustainability Report

Responsibility statement of the Directors in respect of the annual financial report

We confirm that to the best of our knowledge:

-  the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

-  the Strategic Report/Directors' Report includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that they face.

We consider the Annual Report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

By order of the Board authorised signatory:

Aztec Financial Services (UK) Limited

Company Secretary

21 May 2024

Publication of documentation

The above information is an extract of information from HICL's Annual Report. The Annual Report has been submitted to the National Storage Mechanism and will shortly be available for inspection at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism. It can also be obtained from the Company Secretary or from the Investors section of the Company's website, at www.HICL.com. A direct link to the PDF of the Annual Report is also included here: https://www.hicl.com/AnnualReport2024

 

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