The £2.5 billion Guernsey-based investment company plans to raise at least £205 million to complete the acquisition of a US toll road and, subject to investor demand, may seek another £50 million to provide funds for further investments later this year.
In the past three years HICL has used a series of quick ‘tap’ share issues to raise over £467 million from professional investors. Last week’s announcement of a three-week share offer period for existing and new shareholders, however, gives retail investors their first proper look-in to a share issue since 2013.
HICL, one of a handful of infrastructure funds listed on the London Stock Exchange, has grown quickly since its 2006 launch as investors have poured over £8 billion into the sector, liking the steady, inflation-linked dividends they pay.
Over the past ten years the company has delivered a total shareholder return of 153% and consistently raised its dividend from 6.1p per share to what is expected to be 7.65p in the current financial year to 31 March.
The company generates its income from a portfolio of 114 investments, managed by InfraRed Capital Partners. These are long-term contracts in which it gets paid by governments to operate schools, universities, roads, hospitals and accommodation blocks for staff.
Wealth managers and analysts say HICL’s fund raising is likely to be popular as it gives investors a chance to buy the shares below their current trading price.
The offer is priced at 159p, a 4.3% discount to their closing price of 166.2p on Wednesday, the day before the announcement. Although that is 7.9% more than their net asset value (NAV) measured at the end of last year, it still represents a bit of a bargain as the shares currently trade on premium of nearly 14% above NAV.
The lower price means the new shares will yield 4.9%, slightly more than the 4.5% the existing shares offered at Friday’s closing price of 165.8p.
HICL pays four quarterly dividends a year and is looking to increase the payout to 7.85p in 2017/18, rising to 8.05p in 2018/19.
Although these are targets and are not guaranteed, the company’s dividends are backed by relatively secure cash flows generated by 25-year public-private partnerships (PPP) in the UK. It also has government contracts to run assets in France, Australia and Canada, where HICL runs the headquarters of the ‘E’ division of the Royal Canadian Mounted Police.
Around £203 million of the money HICL is looking to raise will buy a 33% stake in the Northwest Parkway toll road in Colorado. This is one of four demand-based projects, where the income it receives depends on how much the asset is used, rather than simply making it available for use, as is the case with the bulk of its investments.
Nigel Moore, senior wealth manager at Pilling & Co in Manchester, said the HICL share issue was a good opportunity for income investors.
‘In our view this does represent a good entry point if investors can access the offer for subscription. The yield is 4.9% due to the target size of £205 million and up to £260 million. I would anticipate the offer will be oversubscribed,’ he said.
Monica Tepes, investment companies analyst at Cantor Fitzgerald, said in addition to expanding the investor base, the fund raising benefited HICL’s existing shareholders because the new shares were being issued a price above their net asset value (NAV).
‘The placing allows investors, existing and new, to invest at a small discount to the market price – and it benefits existing investors as the issue price is at a premium to NAV,’ she explained.
There are two parts to the fund raising: a share placing to existing shareholders who can buy one new share for every 22 they hold until 22 March. Nearly half – or 66.3 million shares – of the initial share offer will be reserved to this.
The remainder will be available to new investors who can subscribe for shares until 17 March.
Share price risks
Although widely viewed as a less volatile source of investment income compared to conventional equities, or shares, infrastructure funds do have risks and are sensitive to changes in interest rates and inflation. Deflation, or falling prices, would damage their portfolios, for example.
High demand for their shares can also see their valuations pushed to excessive highs. For example, HICL saw its share price trade 29% above its NAV in August after investors sought safe havens in the post-Brexit vote uncertainty. The partial unwinding of this premium is why the share price performance has been comparatively weak over one year, with a 10.8% total return below the sector average of 15.2%.
Tepes said the share issue should help avoid the HICL hitting such a big premium in future. ‘All else being equal, the issuance should help address the imbalance between the supply and demand for shares, so it should act to dampen premiums in the sector in the near term in general.’
‘HICL and all of the other infrastructure funds have done a great job and they are in a sweet spot: low risk, income, inflation linkage, low correlation. Demand for their shares should remain high for the foreseeable future. The main thing that's been holding back even more issuance is a lack of suitable assets to buy,' she explained.