Infrastructure trust HICL (LON:HICL) has announced a £68 million investment in Hector Rail, Scandinavia’s largest private sector rail freight operator. The investment trust’s 42% stake will be acquired alongside other InfraRed managed funds, which together will own 100% of Hector.
The deal is noteworthy for being HICL’s first ‘enhancer’ investment. Such deals should support the FTSE 250 trust’s 10%-plus medium-term total return target.
The transaction is expected to complete by the end of the year, when Hector Rail will represent around 2.3% of HICL’s portfolio. Over time, HICL plans to have 20% of its assets in such higher-return investments.
On track for growth
Founded in 2004, Hector Rail has a fleet of around 100 locomotives which are almost entirely electrified. The company initially operated services between Sweden and Norway. However, it has established a presence across Sweden, Norway, Denmark.
Hector is also one of the few companies that runs rail freight between Sweden and Germany. The business provides a full-service rail freight service to a diversified base of blue-chip industrial customers across a range of sectors including timber, intermodal freight and energy.
HICL insists Hector is well positioned for substantial expansion in its target markets. Growth is being driven by ‘long-term demand from existing and new customers for efficient, lower-carbon freight transport’.
Important milestone
Edward Hunt is head of core income funds at InfraRed. He insisted the deal marks an important milestone in the evolution of HICL’s strategy.
| AIC Infrastructure sector | Total assets (£m) | Discount/Premium to NAV | 1-yr share price total return |
| 3i Infrastructure | 4,245.9 | -3.7% | +15.8% |
| HICL Infrastructure | 3,312.2 | -16.6% | +19% |
| International Public Partnerships | 2,852.3 | -9.4% | +21.2% |
| Sequoia Economic Infrastructure Income | 1,464.4 | -9% | +21.6% |
| Cordiant Digital | 1,286.2 | -13% | +36% |
Source: The AIC/Morningstar
‘Hector Rail is a high-quality infrastructure business with a strong position in the Scandinavian rail freight market, supported by clear opportunities for value creation,’ said Hunt.
‘The investment demonstrates HICL’s disciplined approach to selectively enhancing returns for shareholders while remaining focused on essential infrastructure.’
Hector Rail marks a bit of a departure for HICL. The investment differs from the availability-based PPP assets on which the fund forged its reputation.
Nevertheless, the business still boasts defensive attributes. Hector benefits from long-standing customers, inflation-linked multi-year contracts and significant barriers to entry. And there is structural support from the shift of freight from road to rail.
As QuotedData analyst Matthew Read pointed out: ‘Importantly, HICL says the prospective return is materially higher than that available from buying back its own shares.
‘That is the hurdle any new investment needs to clear while HICL trades at a discount. If Hector Rail can deliver the double-digit EBITDA growth being targeted, it should make a useful contribution towards HICL’s new 10%-plus medium-term return ambition.’
Winterflood’s Ashley Thomas added: ‘Although the returns on this investment are likely to exceed the circa 10% achieved via buybacks, at the current 17% NAV discount, investors are likely to want to see a mixture of both ongoing enhancer investment and lower risk share buybacks in HICL’s capital allocation strategy.’
