Buy discounted HICL as it puts failed TRIG merger in the past

Analysts are backing HICL Infrastructure as its wide discount fails to take into account its increasing dividend, buybacks and strategic plan.

Discounted HICL Infrastructure (HICL) is looking increasingly well-priced to analysts as it shrugs off a failed merger, resumes buybacks, and reaffirms its dividend outlook.

The £2.2bn core infrastructure investor is bouncing back from the failed merger with InfraRed Capital stablemate Renewables Infrastructure Group (TRIG) last year.

The decision to step away from combining the portfolio to create a £4bn infrastructure behemoth kickstarted a shareholder consultation, the results of which will be published in May. But the board noted the ‘widespread appreciation’ for HICL’s assets from the 23 shareholders representing 47% of the share register.

Chair of HICL Mike Bane used the interim results to confirm the trust was ‘well-positioned for both capital and income growth’ and announce in line trading in the six months to end of February.

Earnings growth means the trust is on track to deliver its target dividend of 8.35p for the year, up 0.1p on the previous year, and 1.1 times covered by earnings. However, it is expecting to pay a significantly increased dividend in the year to March 2027 of 8.5p.

Cash will also be returned to shareholders via buybacks, which have been resumed following their suspension during talks with TRIG. The board repurchased £4m of shares between 1 January to end of February, taking the total repurchased since its started buybacks to £154m.

The fund said it expects to continue buying back shares where it ‘represents the most effective use of capital’ and is pursuing ‘several live opportunities’ within the existing portfolio.

It is not just shareholders who are showing their support for the trust, with analysts noting the near 24% discount to net asset value (NAV) that the shares currently trade at as a buying opportunity.

Ben Newell, analyst at Investec, said the 24% discount, when compared to closest peer International Public Partnerships (INPP) trading at a 15% discount,  was ‘incongruous now that dividend progression on a sustainably covered basis has been restored’.

‘In our view, this represents a compelling opportunity to access a high-quality portfolio delivering robust operational performance, Ebitda growth and strong cash generation,’ he said, reiterating his ‘buy’ rating on the stock.

Shonil Chande, analyst a Panmure Liberum, said his top pick in the core infrastructure sector was INPP but said HICL was ‘good value’ thanks to the ‘transactability’ of the portfolio.

After a fallow period for transactions as the infrastructure sector fell foul of higher interest rates that saw income investors flock to lower-risk investments, Bane said interest had been renewed, in part by government infrastructure spending plans.

This has seen an uptick in transaction markets and ‘transaction volumes for high-quality infrastructure assets remains strong, underpinned by robust private market valuations, and significant dry powder available for deployment’.

HICL has benefited from this dry powder, disposing of seven public-private partnership (PPP) assets for a total of £225m over the six-month period. Bane confirmed it will consider more ‘opportunistic’ disposals in ‘special situations where outsized returns are available and the economic case for sale is compelling’.

‘There is wide appreciation of the robustness of the NAV, given the scale of transactions within core infrastructure,’ said Chande.

For Chande, the key to narrowing the sticky discount is ‘regaining confidence post the aborted merger’ but said this should happen give HICL is ‘well placed to target a wider pool of non-fund investors, as a 30-year-plus high-visibility, inflation-linked cash profile is hard to find’.

HICL shares have risen over the past year but have failed to keep up with peers in the Infrastructure AIC sector, gaining 13.6% versus the average 16.5%, while the NAV is up just 5.2% against a rise of 8.5% from the average trust.

The three year performance is more disappointing, with the shares losing 9.4% over the period against a 5.3% increase in the shares of the average trust, while the HICL NAV has increased 10.1% over the period while the average trust portfolio has grown 15.3%.

For JPMorgan analyst Christopher Brown said changes could be afoot at the trust, which could make it more attractive to potential investors.

‘The shareholder consultation indicates a broad range of options are being discussed and we expect that some form of corporate change or concession from the board and manager to shareholders may come about as a result,’ he said.