Annual Results for the year ended 31 March 2022

25 May 2022

HICL Infrastructure PLC

ANNUAL RESULTS FOR THE YEAR ENDED 31 MARCH 2022

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 2022. The Annual Report and Accounts are available at the following link: https://www.hicl.com/AnnualReport2022

Highlights

For the year ended 31 March 2022

·      12.8% Total Shareholder Return¹ for the year (2021: 5.5%) reflecting strong financial and operating performance, and 9.0% for the 16 years since IPO, which demonstrates the resilient and defensive nature of HICL's investment proposition in a range of market conditions.

·      10.8p / 7.1% increase in NAV per share to 163.1p (31 March 2021: 152.3p) driven by the portfolio's strong correlation to inflation, the sale of the Queen Alexandra Hospital ("QAH") and the continued competitive pricing of infrastructure assets.

·      9.9% increase in the Directors' valuation² of the portfolio at 31 March 2022 to £3,311.0m (31 March 2021: £3,011.9m).

·      Optimising HICL's portfolio composition to deliver shareholder value:

o  Investments in the year of £110.4m with an additional investment agreed post year end in ADTIM SAS.

o  Three divestments agreed in the year, generating proceeds of £126.3m.

·      FY2022 dividend of 8.25p per share was cash covered at 1.05 times³. HICL's dividend remains the highest cash dividend within the listed core infrastructure peer group. 

·      FY2023 dividend guidance re-confirmed at 8.25p per share⁴. The Board has announced guidance for the FY2024 dividend guidance of 8.25p per share⁴.

·      HICL ended the year with a robust balance sheet, supported by a new £400m GBP multi-currency facility announced in April 2022 and the divestment proceeds from QAH. The Company has significant available cash resources to pursue investment opportunities as they arise.

·      InfraRed continues to build a strong pipeline of attractive investments for HICL, underpinned by its differentiated capability to source new investments across traditional and modern economy infrastructure sectors. This pipeline includes both incremental acquisitions and greenfield opportunities.

·      HICL has also published its Sustainability Report today, which can be found here: https://www.hicl.com/SustainabilityReport2022

1.     Based on interim dividends paid plus change in NAV per share in the year, divided by opening NAV per share

2.     The Directors' Valuation comprises the valuation of the investment portfolio under the Investment Basis and the investments committed to by the Company at the reporting period end. The Directors' Valuation is an Alternative Performance Measure

3.     On an Investment Basis and includes profits on disposal versus original acquisition cost of £4.8m (2021: £11.9m). Excluding this, dividend cash cover is 1.02x (2021: 0.83x)

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

Summary Financial Results

(on an Investment Basis)

Ian Russell, Chairman of the Board, said:

"I am delighted to present these strong financial and operational results for the Company. HICL has clearly demonstrated the resilient and defensive nature of its investment proposition against an uncertain macroeconomic and geopolitical backdrop, delivering a Total Return for shareholders of 12.8% (2021: 5.5%).

"HICL's stable and consistent performance is supported by its considered portfolio composition, notably the contribution of the portfolio's deliberate inflation linkage in the period. The asset mix has been further improved by the year's investment activity, coupled with InfraRed's active approach to asset and portfolio management.

"With a robust balance sheet and well-developed pipeline curated by InfraRed, the Company continues to position itself for growth to capture the significant investment opportunity identified across HICL's core markets."

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

"Core infrastructure continues to be a highly attractive asset class in the current market conditions. HICL's strong inflation correlation (0.8x), low beta, and predictable yield ensure that HICL remains a compelling holding for 'all seasons'. These features have combined to deliver a strong result for the Company.

"InfraRed's multi-fund, international investment management platform continues to curate an attractive pipeline of acquisition opportunities for HICL, across traditional and modern economy infrastructure sectors. We continue to see considerable opportunity to make high quality additions to the existing portfolio in support of the long-term delivery of HICL's investment proposition.

"The Board of HICL is undergoing a key transition, with both the Chairman and the Audit Chair retiring at the forthcoming AGM in July 2022. InfraRed thanks both Ian and Susie for their important contributions to the Boardroom and wishes them all the best for the future."

Chairman's Statement

I am pleased to present these strong financial and operational results for the Company. Against an uncertain macroeconomic and geopolitical backdrop, HICL's performance over the past 12 months clearly demonstrates the resilient and defensive nature of its investment proposition, delivering a Total Shareholder Return for the year of 12.8%¹.

HICL offers its shareholders liquid access to a portfolio of diversified, high quality private infrastructure assets, whose returns benefit from strong inflation linkage and low correlation to wider equity markets². These attributes have supported the long-term delivery of a 9.0% p.a. total shareholder return over the 16 years since IPO¹ in a range of market conditions. This stable and consistent performance is maintained by considered portfolio composition, coupled with InfraRed's active approach to asset management.

Over the year, these two elements have been demonstrated successfully. The strategic management of portfolio composition, via acquisitions and disposals, added substantial shareholder value. Additionally, InfraRed's active asset management approach achieved closer alignment with the Company's key public sector stakeholders, including clients and the Infrastructure Projects Authority, while also de-risking future equity cash flows for the Company. The Investment Manager's Report gives further details of InfraRed's activities in these areas.

Financial Performance

Financial performance in the year to 31 March 2022 has been strong, with Net Asset Value ("NAV") growth of 10.8p per share to 163.1p.

The NAV growth in the year was principally driven by: the impact of the current high inflationary environment on both the actual and forecast financial performance of HICL's portfolio companies; the agreed sale of the Queen Alexandra Hospital PPP project ("QAH") in March 2022; the robust recovery in the performance of the Company's demand assets; and continued upward pressure on the market pricing of infrastructure assets, recognised in HICL's Interim Results in November 2021. This positive performance was partially offset by asset-specific costs, including expected costs associated with defect remediation on selected healthcare projects.

Value Creation and Preservation

The optimisation of HICL's portfolio composition is a central tenet of the Company's strategy to deliver shareholder value. During the year, HICL announced, signed or completed a combined total of c.£237m of acquisitions and disposals. Additionally the Company signed its first fibre broadband investment following the year end.

The Company agreed investments in the year totalling £110m. The acquisitions exemplified the Investment Manager's differentiated approach, in particular by leveraging InfraRed's expertise and deep networks to source investments through less competitive situations - see the Investment Manager's Report for further details. Following the year end, this extended to the Company completing its first investment in Germany, a greenfield PPP in partnership with Vinci, and signing HICL's first fibre broadband investment, ADTIM, which holds two fibre-to-the-home concessions in South-Eastern France.

Generating additional shareholder value through selective disposals further differentiates HICL's approach to portfolio composition versus the listed core infrastructure peer group. Since IPO in 2006, c. 7.5p of outperformance has been delivered through the Company's disposal strategy. HICL agreed three divestments in the year, generating proceeds of £126m. Accretive disposals were achieved on the Health & Safety Executive Headquarters PPP project and Queen Alexandra Hospital. QAH is a flagship, acute public hospital which HICL, via the Investment Manager, had successfully stabilised following the liquidation of Carillion plc in 2018. Additionally, during the year, a small PPP project was handed back to the client - see the Investment Manager's Report and Section - 3.2 Valuation in the full Annual Report linked above for further details.

The easing of the challenges associated with Covid-19 has resulted in a return to a more normal operating environment for the Company. Within this context, we have seen a robust recovery in the performance of the Company's demand assets, which has contributed to this strong financial result.

A proactive approach is taken by the Investment Manager towards key value preservation activities across the portfolio. In the year, this included collaborative industry engagement, including with the public sector, on key issues such as PFI asset handback, the transition from LIBOR to SONIA and the pursuit of net zero greenhouse gas emissions.

Dividend Guidance

HICL continues to pay the highest dividend per share amongst its core infrastructure peer group. In the year, the cash flow generation from the portfolio was in line with expectations and the full year dividend declared for the year to 31 March 2022 of 8.25p per share was cash covered 1.05 times³.

The Board is pleased to re-confirm the dividend guidance of 8.25p per share for the year to 31 March 2023⁴. Cash cover for the 2023 dividend is anticipated to show a steady level of improvement against this year's result.

As previously highlighted, in determining the Company's dividend trajectory the Board is focused on rebuilding dividend cash cover and is pleased with the steady progress made over the last two reporting cycles. In addition, attention is given to the long-term earnings profile of the Company. This latter consideration recognises both the desired balance between HICL's pay-out ratio and the level of reinvestment into the Company's long-term growth; and market conditions, including the higher taxation environment and the lower returns available in the market from high quality core infrastructure assets.

Having taken these factors into consideration, the Board is pleased to announce dividend guidance of 8.25p per share for the year to 31 March 20244.

Continued Sustainability Leadership

Given the Company's position as trusted custodian of essential public infrastructure, the Board believes that HICL is especially well positioned to deliver the 'social' dimension of the ESG framework. HICL is invested in, and manages, assets which 20+ million people globally interact with and rely on. This drives the Company's sustainability strategy, including to meet the increasing standard for disclosure best practice.

HICL has also published its 2022 Sustainability Report, the second annual iteration in its enhanced format, which can be found on the Company's website. HICL continues to report in compliance with the Task Force on Climate-related Financial Disclosures ("TCFD") (see Section 3.7 - Task Force on Climate-related Financial Disclosures in the full Annual Report linked above) and the EU's Sustainable Finance Disclosures Regulation ("SFDR"). The Sustainability Report details the Company's progress in the year, including with respect to enhanced asset-level data collection, especially for emissions, as well as the key milestones ahead in the Company's sustainability ambitions.

Looking forward, the Company is working to comply with the step-up in disclosure required under SFDR from 1 January 2023 and the announcement of the UK's Sustainable Disclosure Requirements regime ("SDR") which is expected to align with SFDR.

Given the continued drive across HICL's markets toward net zero, the Board welcomes InfraRed's decision in July 2021 to join the Net Zero Asset Managers Initiative, reflecting InfraRed's commitment to achieve net zero emissions across the HICL portfolio by 2050, as well as setting interim targets for 2030.

For an in-depth review of the Company and Investment Manager's sustainability performance and ambitions, please see HICL's Sustainability Report available on the Company's website, under Reports & Publications.

Investment Manager

Over the last two years, and overseen by the Board, InfraRed has implemented a succession plan for the team managing HICL. This well-coordinated process has seen leadership of the team transition to Edward Hunt (Head of Core Income Funds), supported by Helen Price (CFO, Core Income Funds), with Harry Seekings and Keith Pickard stepping away from their day-to-day involvement with HICL. Earlier this month, InfraRed announced that Harry would be relinquishing his executive role at InfraRed and consequently leaving the HICL Investment Committee. Harry will continue his contribution to InfraRed as a Senior Adviser and remains available to both the InfraRed team and the Board for support and advice as needed. On behalf of the Board and our shareholders, I would like to thank Harry and Keith for the very considerable contributions which they have made to the development of the Company.

Board Succession

In line with the UK Corporate Governance Code, after nine years on the Board, Susie Farnon and I will step down in July 2022. Susie was appointed to the Board in 2013 and has served as Chair of the Audit Committee for five years. I would like to thank Susie for her excellent leadership of the Audit Committee and her valued contribution to the Company.

As previously announced, Mike Bane will succeed me as Company Chair, Rita Akushie will replace Susie as Chair of the Audit Committee and Frances Davies will replace Mike as Chair of the Remuneration Committee. All appointments are effective from 20 July 2022, subject to the Directors' re-election at the 2022 AGM.

The Board acknowledges the importance of diversity of ideas and experience to deliver enhanced decision-making. To support this, HICL seeks to comply with external guidance and policy on board diversity. HICL's Board composition has been compliant with the recommendations of the Hampton-Alexander and Parker Reviews since 2020. The Board further notes the FCA's April 2022 Policy Statement on diversity and inclusion on company boards and the Nomination Committee will address this in due course. HICL's succession plan generally seeks to ensure a continuity of appropriate skills and experience amongst the Directors as a whole.

Outlook

The outlook for infrastructure investment remains positive. The key defensive attributes of core infrastructure, including the strong yield, inflation-linked returns and low beta, underpin the continuing attractiveness of the asset class, and of HICL itself, to investors against the broader market backdrop. Demand for infrastructure investment is expected to continue to support valuations for high quality assets.

The Company continues to position itself for growth, to capture the significant opportunity identified across HICL's core markets in both traditional and modern economy infrastructure sectors. InfraRed's differentiated capability to source new investments via less competitive situations, as demonstrated in the year, remains crucial in the current market conditions. Continuation of partnerships with key industry relationships will support this pursuit.

With a well-developed and visible pipeline of core infrastructure opportunities and substantial headroom within the Company's credit facilities, the Board is confident that HICL is well placed to continue to deliver on its strategy and grow into the future.

Ian Russell, Chairman

24 May 2022

1.     Based on interim dividends paid plus change in NAV per share in the year, divided by opening NAV per share

2.     Inflation correlation of 0.8x; Beta of 0.32 against FTSE All-Share for 12 months to 31 March 2022

3.     Stated on an Investment Basis and including profits on disposals versus original acquisition cost of £4.8m. Excluding this, dividend cash cover is 1.02x

4.     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

Operational Highlights

The performance of the portfolio was strong for the year ended 31 March 2022, returning 9.6% (7.7% at 31 March 2021)¹, significantly ahead of the Company's expected return of 6.8% for the period (the Company's weighted average discount rate at 31 March 2021).

This outperformance was driven by higher than expected inflation feeding through asset-level valuations, continued market pressure on infrastructure asset pricing (as reflected in HICL's Interim Report 2021), the accretive disposal of Queen Alexandra Hospital, and other value enhancement activities delivered by InfraRed's specialist asset and portfolio management teams. The demand-based and regulated assets delivered an outsized contribution to portfolio outperformance, principally due to the stronger inflation linkage in these segments. The portfolio outperformance is reported net of asset-specific costs, including in respect of the management of defect remediation on selected healthcare projects.

Segment overview

HICL's PPP portfolio (66% of the Directors' Valuation at 31 March 2022; 71% at 31 March 2021) performed well, underpinned by its availability-based contracted revenues. In the year, InfraRed's Asset Management team worked extensively with public sector clients, particularly in healthcare, to successfully navigate the challenges posed by Covid-19. Proactive engagement with the public sector extended to successful collaboration across broader industry issues such as the cessation of LIBOR, the approach to handback of PFI assets at contract expiry and the transition to net zero greenhouse gas emissions.

Typical of real assets, the active management by InfraRed of physical asset condition across the PPP segment continued to be a key priority. This included proactive leadership and control of the delivery of remediation works by responsible parties where necessary (including identified construction defects), with the effect of de-risking the associated equity cash flow assumptions where impacted. Further information is included in the Risk Management section below.

Demand-based investments (22% of the Directors' Valuation at 31 March 2022; 19% at 31 March 2021) continued to see a robust recovery from the disruption associated with Covid-19, broadly tracking in line with the Company's valuation assumptions taken at 31 March 2021. The range of outcomes for the traffic forecasts across these assets continues to narrow and be de-risked.

The performance of HICL's regulated asset segment (12% of the portfolio by value as at 31 March 2022; 10% at 31 March 2021) in the year was pleasing. In addition to the 100% average annual availability recorded across HICL's four OFTO assets, Affinity Water delivered solid operational progress, improving its relative industry ranking in Ofwat's annual assessment².

Enhanced disclosure on each of HICL's Top 10 assets is provided this year and is set out in Section 2.6 in the full Annual Report linked above.

HICL's business model delivering value

The active management of the Company's portfolio composition by InfraRed is a significant driver of shareholder value. Acquisitions totalled £110.4m in the year, with a further investment announced post year end.

The Company completed acquisitions in incremental stakes in Bradford Schools I & II PPP projects (29% and 34% stakes for £16.1m combined); acquired a 58.3% interest in the Road Management Group shadow toll roads (£56.1m in two tranches); committed £10.4m to the B247 greenfield road PPP in Germany (which completed post-year end) and committed to invest £27.8m in an existing UK health holding in the first half. Post year end the Company announced its first fibre investment, acquiring a 55% interest in ADTIM SAS, a wholesale fibre network servicing rural communities in France, representing c. 2% of portfolio value at 31 March 2022.

This investment activity was accretive to key portfolio metrics and, importantly, illustrated InfraRed's differentiated approach to sourcing investments via less competitive situations, including: incremental stakes in existing holdings (e.g. Bradford Schools); greenfield investments (e.g. the B247); and relationship-driven pipeline (e.g. RMG Roads). Most recently, HICL announced a forward-looking partnership with VINCI Highways in Germany and is pleased to have re-entered its partnership with the Mitsubishi subsidiary, Diamond Transmission Corporation, to bid for the Hornsea II OFTO. Such partnerships serve to support key relationships and secure consistent and longer-term pipeline for the Company.

Periodic asset disposals remain an important lever to optimise portfolio construction and deliver outperformance. In the year, HICL agreed to dispose of its 100% interest in the Queen Alexandra Hospital ("QAH") PPP project (March 2022) and completed the sale of its 50% interest in the Health & Safety Executive Headquarters PPP project (October 2021). Both disposals are accretive to key portfolio metrics and together delivered a combined holding period return of c. 10% per annum³. Finally, the return of a small PPP project was effected under the voluntary termination regime, reflecting changes in the client's ongoing requirements for the facility. These divestments enable the effective rotation of proceeds into the accretive acquisition activity discussed above.

Financial Highlights

NAV per share increased by 10.8p over the year to 163.1p at 31 March 2022 (31 March 2021: 152.3p). The Company's annualised total shareholder return, based on growth in NAV per share plus dividends paid, was 12.8% for the period (31 March 2021: 5.5%). On the same basis, in the 16 years since its IPO, HICL has delivered a total shareholder return of 9.0% per annum.

The recovery in cash cover to 1.05x⁴ was as planned and driven primarily by solid cash generation from the underlying portfolio.

Further information on the investment valuation and financial performance can be found in Section 3.2 - Valuation of the Portfolio and Section 3.1 - Financial Review, respectively, in the full Annual Report linked above.

On 1 April 2022, the Company announced a new £400m GBP multi-currency facility. Headroom within the Revolving Credit Facility was £264.6m at the year end. Together with the expected proceeds from the agreed sale of QAH, the Company has a robust balance sheet and is well placed to fund its attractive investment pipeline.

Governance

The Board of HICL is undergoing a key transition within its succession plan. Chairman, Ian Russell, and Audit Chair, Susie Farnon, will both retire in July 2022. InfraRed reflects upon the substantial contributions of Ian and Susie, and expresses its sincere gratitude for their unwavering dedication throughout this important period for HICL.

HICL will now open a new chapter. As previously announced, the planned Board transitions will be effected with Mike Bane due to be appointed to the Chairman role, Rita Akushie to the role of Audit Chair, and Frances Davies to Remuneration Chair. The Investment Manager has worked closely with Mike, Rita and Frances around the boardroom table and looks forward to continuing to do so in their new roles.

Sustainability

Sustainability is embedded in the Company's business model. HICL's sustainability credentials can be viewed in two parts:

·      the inherent social good derived from assets that provide essential services to communities; and

·      the benefit that is derived from an active sustainability strategy that seeks to drive improvements in the ESG performance of the underlying assets in the portfolio.

The Investment Manager recognises the importance of both of these elements in the Company's strategy to provide sector leadership on sustainability. InfraRed's enhanced investment processes ensure a systematic evaluation of asset-level sustainability credentials when making acquisitions. Equally important, InfraRed's active asset management enables robust measurement of, and tangible improvements across, the Company's reported sustainability metrics (set out in detail in HICL's Sustainability Report 2022, available on the HICL website).

HICL and InfraRed's commitment to sustainability best practice was further demonstrated in the year. For the second successive year, HICL has reported across all 11 recommended disclosures from the Task Force on Climate-related Financial Disclosures ("TCFD"). HICL has complied with the EU's Sustainability Finance Disclosure Regulation ("SFDR") since March 2021, noting the step-up in disclosure obligations applicable from 1 January 2023. From this date, InfraRed intends to report for HICL in accordance with Article 8 of the regulations. Finally, InfraRed's own ambition for net zero was formalised in the period through its decision to join the Net Zero Asset Managers initiative, committing InfraRed to achieve net zero emissions across the HICL portfolio by 2050, with interim targets by 2030.

Highlights are provided in Section 2.7 - Sustainability Highlights in the full Annual Report linked above. Further detail is set out in the Company's Sustainability Report 2022, available on the HICL website.

Risk Management

HICL's risk appetite statement, approach to risk management and governance structure are set out in Section 3.4 - Risk and Risk Management in the full Annual Report linked above.

Commentary on the Company's key risks is set out below.

Political and regulatory risk

Geopolitics

The Investment Manager notes the geopolitical consequences of war in Eastern Europe. The Company is not directly exposed to the region, via either its investment portfolio or its shareholder register. Notwithstanding this, secondary impacts to supply chain, energy costs and inflation are likely to provide an element of challenge to all, including HICL's portfolio companies.

Recognising this heightened uncertainty, HICL's portfolio provides defensive positioning against greater volatility in financial markets. HICL's beta over the year was 0.32⁵ illustrating the diversification that HICL can bring to shareholders' portfolios.

LIBOR/SONIA transition

The risk associated with the transition of PFI contracts from LIBOR to SONIA has continued to be actively managed down. Following HICL's announcement in July 2021 of the first successful transition by InfraRed of a UK PFI project, 90% of the portfolio by value had transition arrangements substantively agreed. The remainder of the portfolio is expected to be resolved over the course of 2022.

PFI handback

The process whereby PFI projects revert to public ownership is still in its infancy, but gathering momentum over the next decade. Ensuring the smooth transition of assets over time is therefore a prominent issue for all PFI stakeholders, public and private sectors alike. The Investment Manager believes strongly that initiatives of such scale can only be resolved through genuine collaboration across project stakeholders. In this vein, InfraRed strongly supports the efforts of the Infrastructure and Projects Authority ("IPA") to establish numerous dedicated working groups to discuss and develop solutions to cross-industry challenges such as 'handback' and the transition to net zero. InfraRed representatives have joined a subset of these working groups, as an active and collaborative partner. Further initiatives such as the IPA's contractual 'health checks', in which a HICL asset participated, as well as InfraRed-sponsored handback preparation initiatives on three other UK PFI assets, continue to guide InfraRed's planning and asset management design around this risk. HICL has c. 2% of its portfolio scheduled to be handed back before March 2030. To date, two HICL projects have reached concession expiry: one received a contract extension, and the other was handed back successfully.

Client relationships

The Investment Manager continues to highlight the risks inherent in long-term partnership frameworks, particularly when operating and financial pressures are more acute, such as those seen in the UK healthcare sector over the last 24 months. For a small subset of these assets, this has resulted in more adversarial forms of contract management from healthcare clients, with negative consequences for the PFI project and its stakeholders. To date, this remains immaterial to the portfolio; however the potential for further instances of this behaviour, including the non-payment of contracted revenues, continues to pose a risk to the Company's cash flows. Following the disposal of QAH, the Company has 27% of the portfolio in UK healthcare assets (29% as at 31 March 2021).

Counterparty risk

By design, HICL has a significant network of service delivery partners, which operate across the assets in the portfolio. By transferring long-term delivery obligations to these specialists, risk is transferred to the party best able to manage it. The residual risk to the Company is therefore where these counterparties underperform or fail. The management of HICL's exposure to the performance of its network of delivery counterparties is a key mitigation to this risk. The breakdown of service delivery counterparty exposure is set out on page 51 in the full Annual Report linked above.

The proposed acquisition of Engie SA's services unit, Equans, by Bouygues S.A. has been noted by the Investment Manager. Once completed, this transaction will increase HICL's exposure to the Bouygues Group to 25% by value⁶ (31 March 2021: 15%). Recognising Bouygues' strong performance track record and credit profile, InfraRed remains comfortable with this level of concentration.

Management of facility condition remains a key focus of InfraRed's Asset Management team. This includes the identification of physical quality issues (including defects), the utilisation of lifecycle budgets and the effective management of specialist subcontractors. This latter activity includes taking necessary action to ensure construction defect remediation, where appropriate, and is a key mitigant to this risk.

Covid-19 and consumer behaviour

A subset of the Company's demand-based assets continues to be impacted by the effects of Covid-19. Within the Directors' Valuation, assumptions have been adopted in respect of the recovery profiles of the individual assets (e.g. traffic assumptions). While visibility of the recovery trajectory is improving with time, some risk remains around these future assumptions.

Across HICL's geographies, significant progress has been made in the management of Covid-19 in the period and the risk posed to the portfolio has steadily decreased over the year. Longer-term, the potential for more systemic shifts in consumer behaviour (e.g. working practices or modal selection) remains uncertain and could impact asset demand within the HICL portfolio, either positively or negatively. An assessment of this uncertainty is included within the Directors' Valuation.

Macroeconomic risk

The prospect of persistent high inflation presents the risk of declining real returns to investors. To the extent that policy makers utilise monetary levers to manage higher inflation, interest rate increases may result. Higher interest rates have the potential to negatively impact asset pricing.

Importantly, the returns from HICL's high quality core infrastructure portfolio are highly correlated to inflation at 0.8x⁷ over the long term. Recognising the current high inflationary environment, additional NAV and cash flow sensitivities have been included in Section 3.2 - Valuation of the Portfolio on page 47 in the full Annual Report linked above. Where inflation is higher than HICL's valuation assumptions by 3% for the next three years, NAV would increase by 10.2p per share.

In relation to interest rates, there is also a degree of protection built in to discount rates. From its lowest point in 2007, the implied equity risk premium (the difference between the discount rate and risk-free rate) expanded from 2.5% to an all-time high of 6.5% in March 2020. The current equity risk premium of 4.8% continues to provide an element of buffer to cushion the impact of rising risk-free rates on asset pricing. Additionally, over this same period we have seen a step change in the embrace of infrastructure as an asset class by institutional investors⁸. This has contributed significantly to the observed downward pressure on required returns from the sector, in addition to the decline in risk-free rates.

The Investment Manager also notes the prospect of stagflation in the context of the supply side constraints driving current inflation and the potential for economic contraction. Should policy makers allow greater levels of inflation (i.e. with limited use of monetary controls), HICL's investment proposition would be expected to continue to provide protection to shareholders, and the relative attractiveness of the asset class would be expected to further increase.

Climate Change

Climate change risks to the Company are both the physical risks that a changing environment poses to real assets, and the transition risks arising as a consequence of authorities seeking to limit the extent and impact of a changing climate through policy initiatives.

Primary mitigations exist at project level including contractual protections, insurances and the finite nature of the concessions. At a corporate level, the Company has reported against all 11 of the Task Force on Climate-related Financial Disclosures ("TCFD"). The disclosure includes a comprehensive assessment of the risks to the Company posed by climate change. This is set out on pages 68-73 in the full Annual Report linked above.

Market and Outlook

The Company is well positioned to deliver its strategy, notwithstanding heightened uncertainty in the broader market. Indeed such instability continues to highlight the relative attractiveness of core infrastructure versus other asset classes. HICL's strong inflation correlation (0.8x), low beta, and strong predictable yield, ensure that HICL remains a compelling holding for 'all seasons'.

The appetite for the asset class has continued to support infrastructure asset prices, despite the evolving macroeconomic environment. Competition for high quality core infrastructure assets remains high. This dynamic continues to support the valuation of HICL's existing portfolio and is also reflected in the market for new investments.

The Investment Manager remains focused on the enhancement of HICL's Investment Proposition (refer to page 16 in the full Annual Report linked above) and continues to position the Company for growth in pursuit of this. InfraRed views positively the opportunity to continue to make high quality additions to the existing portfolio and improve key portfolio metrics.

The Company's vision, to deliver strong social foundations, connect communities and support sustainable modern economies guides HICL's investment ambition. This reflects the fundamental role that traditional infrastructure sectors play in our society (e.g. social, transportation) as well as the increasing role of those sectors driving the modern economy, such as communications (e.g. fibre, towers) and the energy transition (e.g. OFTOs, district utilities). HICL's thematic approach aligns with InfraRed's broader strategic investment outlook and activity across the range of funds managed by InfraRed. This multi-fund, cross-strategy investment platform enables the full weight of InfraRed's expertise, international footprint and track record to be brought to bear for HICL, across the core infrastructure landscape.

InfraRed actively manages a strong pipeline of investment opportunities for the Company, underpinned by its differentiated capability to source attractive new investments via less competitive situations. This encompasses a continued focus on:

·      Relationship driven pipeline: building upon the announced partnerships with key industry relationships;

·      Incremental acquisitions in the existing portfolio: 72% of the portfolio by value is less than 100% owned (31 March 2021: 69%). As highlighted in HICL's Interim Report 2021, InfraRed will continue to explore incremental opportunities across all existing portfolio segments, including the demand-based assets correlated to GDP on a case-by-case basis; and

·      Greenfield opportunities: building on InfraRed's 20 year-plus track record in successfully delivering assets through construction. Existing exposure to assets in construction is 3% by portfolio value (31 March 2021: 3%).

Achieving the appropriate risk and reward balance for HICL continues to be of highest importance. InfraRed's disciplined and structured use of its core infrastructure framework (refer to page 18 in the full Annual Report linked above) to evaluate new opportunities ensures that HICL continues to pursue high quality core infrastructure assets, aligned with HICL's clear risk and reward mandate, and in support of the delivery of HICL's investment proposition.

1.     For further explanation refer 'Alternative Performance Measures' in Section 3.1 - Financial Review in the full Annual Report linked above

2.     Ofwat, Service Delivery Report 2020-2021, November 2021

3.     Calculated as an IRR, reflecting the initial purchase price, distributions received, and the final sale price

4.     Including profits on disposal versus original acquisition cost of £4.8m. Excluding this, dividend cash cover would have been 1.02x

5.     Calculated as the daily HICL share price return vs FTSE All-Share daily return over 12 months to 31 March 2022

6.     The proportion of the portfolio, by value, to which Bouygues provides facilities management services

7.     If outturn inflation was 1% p.a. higher than the valuation assumption in each and every future period, the expected return from the portfolio (before Corporate Group expenses) would increase by 0.8%

8.     1445% increase in unlisted infrastructure assets under management between December 2006 and March 2021, Preqin data

Directors' Responsibility Statement

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.

In accordance with Disclosure Guidance and Transparency Rule 4.1.14R, the financial statements will form part of the annual financial report prepared using the single electronic reporting format under the TD ESEF Regulation. The auditor's report on these financial statements provides no assurance over the ESEF format.

By order of the Board

Authorised signatory

Aztec Financial Services (UK) Limited
Company Secretary
24 May 2022

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/AnnualReport2022