HICL has withdrawn its dividend guidance for this year as it looks to save cash during the Covid-19 recession
UK’s HICL Infrastructure (HICL) has withdrawn its dividend guidance for this year as the listed alternative income fund looks to save cash and make the portfolio of hospital, school and toll road contracts as resilient as possible during the Covid-19 recession.
Though this might sound like another piece of bad news for income investors, following a £30bn tidal wave of dividend cuts and suspensions by UK quoted companies in response to the coronavirus lockdown.
After all, the unprecedented threat to investment income has prompted even closed-end funds with revenue reserves to highlight the uncertainty over future shareholders payouts.
However, HICL, a £3bn investment company popular with income investors because of the largely inflation-linked, government-backed revenues it earns from 117 investments, is simply refraining from chasing a higher dividend for 2020/21.
Instead HICL is repeating the target of 8.25p per share which it has just achieved in 2019/20.
It has also withdrawn a target of 8.45p per share for the year to 31 March 2021 which it set last November but had indicated in March was under review.
Chair Ian Russell believed it was inappropriate to increase the dividend this year given the exceptionally severe disruption to the UK economy from Covid-19.
The directors have therefore taken the decision to target a dividend of 8.25p per share for the year ending 31 March 2021, matching the dividend paid for the financial year just ended, and will revisit dividend guidance for the year ending 31 March 2022 when the timing and extent of economic recovery becomes clearer, he said.
For the financial year just gone, HICL delivered its 8.25p in quarterly dividends with the distributions covered by cash, a performance that Infrared fund manager Harry Seekings described as ‘solid’.
Anything approaching solidity in the current commercial meltdown is highly prized by investors, which is why the shares at an unchanged 164p have rallied 20% since the market lows at the end of March and are not far off their starting point in January.
According to Morningstar, this has put the shares on a near 7% premium over net asset value, although JPMorgan analyst Christopher Brown estimates HICL’s current NAV per share to be 153.7p, which equates to a 5% premium.
HICL offers a dividend yield of 5% which at a time when the UK government is issuing debt on a negative coupon, or interest rate, looks highly attractive.
Of course nothing is totally immune from the unprecedented financial disruption Covid has caused and HICL’s dividend cover is weakening. It expects its dividends this year to be ‘substantially covered’ by earnings, which suggests a small shortfall, which could be worrying, though Brown said the gap could be easily be funded from borrowings as he said the company’s debt only represented 2.2% of assets.
HICL has also been buffeted by economic and political uncertainty. In the year to 31 March net asset value per share declined 3.3% or 5.2p to 152.1p, below its targeted annual return of 7-8% but a modest slip compared to the recent falls suffered by equity and debt funds.
That resilience reflects that fact that nearly three quarters of its investments are in public-private partnership (PPP) contracts in which HICL simply has to make the facilities ‘available’ to get paid. While that’s an operational challenge during lockdown, the contracts to run schools, hospitals and prisons are not exposed to the economic downturn.
However, around 18% of the £2.9bn portfolio is economically exposed to ‘demand-based’ assets, which mainly consist of three contracts to run the A63 and Northwest Parkway toll roads in France and the US, as well as the HS1 rail connection between London and the Channel tunnel.
Restrictions to movement have pretty severely impacted revenues, Seekings told Investment Trust Insider. Although HICL expects the lockdown will start to ease from the end of June it anticipates it will take two-and-a-half years for traffic levels to regain their pre-Covid levels.
That’s why the valuation of these assets has been cut by £72m, equal to 4p of the deduction in NAV per share announced today. The other factors were the £40m writedown of its stake in Affinity Water in the first half of the financial year, the impact of rock-bottom interest rates on what it earns on cash and the government’s reversal of cut to corporation tax.
Overall analysts were impressed the results had not been worse. Priyesh Parmar of Numis Securities said the NAV decline was disappointing but, including dividends, he noted the total return to shareholders had been slightly positive.
Moreover, we believe the approach to valuation has been relatively prudent and assets remain attractively valued compared with the wider real asset sector and long-term bond yields, he said.
Brown added: Operationally the portfolio companies are responding well to Covid-19 challenges to keep essential infrastructure running smoothly, particularly within the healthcare PPP portfolio.
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