Thursday, 9 February 2017

HICL Infrastructure Trust - Purchase

In my end of year review for 2016, I made a brief mention of my purchase of this trust for my income portfolio.

HICL raises money from investors and then buys up infrastructure assets such as hospitals, schools and police stations around the world. The majority of the portfolio is focused in the UK and HICL receives management fees for the maintenance of these buildings, and, in some cases, for providing extra services such as catering and cleaning.

The advantage of the investment strategy is that it isn’t exposed to the construction risk of new build, as it buys them when they are finished. The revenue stream is highly predictable as the contracts are long term and in many cases government backed.

The average infrastructure investment trust has generated a 40% total return over the past three years, according to data from FE Trustnet, compared with a 16% return for the average trust in the UK Equity Income sector. This has caused me to have a look at this sector with a view to providing a little more diverse income stream.

According to data from Winterflood, the infrastructure sector had an average net yield of 4.8 per cent, as at 9 December - “The infrastructure sector has been the shining light in this theme and, with an aggregate market cap of £12.4bn, it is larger than any other single income-focused sector,” it noted.

Latest Results

HICL Infrastructure reported an annualised total return for the six months to 30 Sept 2016 of 10.4%, based on dividends paid and an increase in the firm's net asset value (NAV).

NAV per share came in at 145.7p, for a rise of 2.5% from March's figure, and dividends in the period of 3.82p per share support the company's full-year target of 7.65p which would provide a yield of 4.6% on today's share price. The target for the following year is an uplift of 2.6% to 7.85p and guidance of 8.05p for 2018/19.

A return of 10.4% is very impressive, and if it could be repeated year after year, it would be enough to double my original investment in just seven years - that would be very nice but probably not very likely.
HICL announced its investment portfolio value was up 7.9% in the six months, to £2.2bn, and there is a strong pipeline of investments in the planning stages. Total income rose by 19.2%, with pre-tax profit up 19.1%, and dividends declared so far have been lifted by 2.7%.

The portfolio comprises stakes in 112 infrastructure assets which have a weighted average concession life of over 20 years.

The income yield to shareholders has been consistently 4.5% + year after year whilst average total return over the past 5 yrs has been 12.1% p.a.

3 Yr Chart HICL -v- FTSE All Share
(click to enlarge)

The share price has seen a decent rise in recent years and I am hoping this can continue given all the political talk about investing in infrastructure. However, one reason for the good performance has been the falling costs of debt, and were we to experience a prolonged period of rising interest rates and bond yields then asset values would likely fall.

Another point to note is that the shares are currently trading at a premium to their underlying value although this has narrowed in recent months.

The shares were purchased in December at the price of 162p. The next quarterly dividend which I expect will be 1.91p, is due to be announced next week.

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!

2 comments:

  1. Hi DIY
    Thanks for this review - their investment strategy is very interesting. The high premium would put me off buying but this looks like one to keep an eye on. Cheers.

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  2. Good to see you back weenie.

    Yes, I had reservations about the premium but it seems all the ITs in the sector trade at a hefty premium to NAV. HICL has always been at a premium apart from a blip in 2008 ..a few months back it had been above 20% but is now back to around its long term average of ~10%.

    Good luck if you decide to add to your portfolio.

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