HICL Infrastructure (LSE:HICL) shares stood at about 15.6% below net asset value in early November, compared with a 12-month average of more than 20%, after a year of disposals and buybacks.

The narrower discount draws attention to the group's approach to Capital allocation, which has been a defining theme for the listed infrastructure sector.

For the year to 31 March, the company reported a total NAV return of 10.3%, with net asset value rising 4.6% to 160.2p a share. Total Shareholder return reached 13.1%. Management said the expected net return at the then discount was about 10% a year, against a portfolio discount rate of 8.5%.

About the company

HICL Infrastructure is an Investment company that owns a diversified portfolio of infrastructure Assets and aims to deliver a progressive Dividend and capital preservation for shareholders. Its holdings include public-private Partnership projects such as schools, hospitals and transport links, along with regulated utilities, renewable energy and digital and transport businesses. Many of these assets earn Revenue under long-term contracts or regulatory frameworks, which tends to make cash flows more predictable and often linked to inflation.

The company earns income from distributions and interest on the investments it holds, and it creates further value by improving asset performance, refinancing and, where the price is attractive, selling holdings. Capital recycling is therefore central to strategy: proceeds from sales are used to repay debt, fund Buybacks and invest in growth opportunities, notably in assets with expansion potential. The article's figures show how this works in practice, with about £536m of sales at an average premium to carrying value of 11%.

Key financial markers for the year to 31 March include a total NAV return of 10.3%, net asset value of 160.2p a share and a total shareholder return of 13.1%. The portfolio was valued at around £3.1bn, with 53% in yielding assets and 47% in growth-oriented assets, while the fee structure now relies entirely on market capitalisation.

Sales above book value

Asset disposals formed the backbone of last year's narrative. HICL (LSE:HICL) reported about £536m of accretive sales, far above its £200m target, at a weighted average premium to net asset value of 11%. The A63 motorway in France was sold at a 21% premium to its carrying value, and seven public-private partnership assets went to APG for a combined £225m. Disposals over three years have now passed £1bn.

Part of the cash went on share repurchases. HICL bought back £103m of its shares in the year at an average discount of about 24%, taking cumulative buybacks to £189m, and management said it was aiming for the discount to close altogether, setting out its target in plain terms. Buybacks contributed 1.6p to the rise in NAV, while value enhancement across the portfolio added 3.7p.

The dividend policy is progressive, with guidance of 8.65p per share for the financial year to March 2028. The quarterly payment went up to 2.12p with the distribution that went ex-dividend on 27 August and was paid on 30 September. Cash cover was 2.38 times including disposals and 1.10 times excluding them, the gap between the two reflecting the scale of last year's sales.

Why listed infrastructure trades at a discount

Listed infrastructure funds have traded below net asset value for an extended period. Higher interest rates raise the discount rates used to value long-dated cash flows, and they make the dividend Yield of Government Bonds more competitive. Investors also question whether the reported valuations would be achieved in a sale, which is why disposals above carrying value attract attention.

Sales at a premium offer direct evidence for the valuation methods used, and share repurchases at a discount increase net asset value per share for those who remain. The combination is the route management has chosen to narrow the gap, rather than relying on a change in market mood.

What could shape the interim update

The interim figures should show how the portfolio has developed since the year end, including any impact from the Cross London Trains purchase and the ongoing growth capital expenditure. Dividend cover, both with and without disposal proceeds, will indicate how much of the payout is supported by underlying operations.

Rates and bond yields remain the main external variable, since changes in long-dated yields feed directly into portfolio valuations. Investors will also watch for any further disposals, the scale of buybacks and whether the discount continues to narrow from its recent range.

The interim period also provides a chance to see how the new fee arrangement feeds into the expense ratio, an area where the board has set a clear direction.

Portfolio mix and costs

The portfolio's Fair Value was about £3.1bn at the year end. Yielding assets accounted for 53% of that, with growth-oriented assets making up the remaining 47%. Affinity Water represented 13.6% of the portfolio and received £50m of incremental capital. HICL (LSE:HICL) also expects to invest around £600m in growth Capital Expenditure over the next five years.

Since then, the company has completed the £51.8m purchase of a stake in Cross London Trains, on 20 May, with management saying it expected the deal to add more than a penny to NAV per share at the next revaluation. Its fee structure has moved to one based entirely on market capitalisation, which it estimated would cut its expense ratio to about 90 basis points from 1.03%.

The fund's gearing stood at 7.1% at the year end, with Liquidity of £304m and an undrawn revolving Credit Facility of £395m. Rising long-dated bond yields remain a central sensitivity for valuations across the sector, with the US 10-year Treasury Yield having reached 5.29% at the end of September.

For this FTSE 250 investment company, interim figures will offer the next test of whether disposals, buybacks and steady operational returns can continue to compress the discount.