Sequoia Economic Infrastructure Income Fund Limited (the “Company”)
STRONG INTEREST INCOME GENERATION FROM RESILIENT PORTFOLIO WELL POSITIONED TO DELIVER ATTRACTIVE AND SUSTAINABLE RETURNS
Interim Results for the six months ended 30 September 2024
Key Highlights
Resilient portfolio generating substantial cash
- NAV per share growth of 1.3% to 95.03p (FY24: 93.77p), driven in part by the strong interest income of the portfolio (94.37p as at 31 October 2024).
- Total dividends of 3.4375p per share, consistent with full year target of 6.875p. First half dividend yield of 8.6%. Dividend cash cover of 1.06x.
- Total NAV return of 5.1% in the first half, on track to meet target annual gross return of 8-9%.
- Significantly outperformed Gilts by 3% over the six-month period and broadly in line with leveraged loans and high-yield bonds.
Maintaining credit quality of the portfolio without a reduction in targeted yields
- 54.8% of the portfolio in defensive sectors including digitalisation, accommodation, utilities and renewables.
- 58.5% of the portfolio in senior secured loans and 41.5% in subordinated debt, maintaining the high proportion of senior secured debt historically previously held.
- Low construction risk in the portfolio at 8.1%, achieved via higher scrutiny being applied to new construction assets at the origination stage of the investment process.
Good progress on recovering value from non-performing loans (“NPLs”)
- Post the period end have resolved two out of the three challenging positions.
- Reduced proportion of NPLs to 3.7% of the portfolio (as at 30 November 2024) from 5.5% (as at 30 September 2024).
Stable or declining interest rate environment supportive for SEQI
- A gradually declining lower interest rate environment will benefit fixed rate loans and bonds by accelerating their move towards face values as they approach maturity (pull-to-par).
- 62% of the portfolio in fixed rate loans (FY24: 58%), taking advantage of higher base rates to generate higher levels of income as interest rates fall.
- Interest rate swaps increase visibility of future cash flows and provide protection for floating rate loans against a faster-than-expected fall in short-term rates.
- Decreasing inflation and interest rates enhance the appeal of alternative infrastructure investments relative to liquid credit.
Strong pipeline of investment opportunities, supported by a highly selective investment policy
- Net cash position of £68.8 million available to invest in new opportunities in addition to ongoing share buyback programme.
- Substantial, diverse pipeline of approximately £500 million in potential investments with an average yield of 10.1%.
- Commitment to maintaining highly selective approach to new investments, favouring defensive sectors with high barriers to entry that provide essential services and that are expected to benefit from an improving economic backdrop.
Proactive and balanced approach to capital allocation and sustained ESG progress
- Significant share buyback programme with 49.3 million shares repurchased in the last six months; one of the largest levels of buyback in the listed fund sector.
- Ongoing approach to target the share buyback strategically and potential to modestly increase fund leverage to take advantage of attractive pipeline of opportunities.
- Continued investor education and outreach plan to expand universe of investors and increase proportion of retail shareholders.
- Improvement in portfolio’s weighted average ESG score to 64.65 (FY24: 62.77), driven by both acquisitions of higher-scoring assets and increased engagement with existing borrowers to enhance their ESG scores.
James Stewart, Chair, commented:
“I am delighted to announce another robust half year performance. As the economic challenges experienced in the previous financial year have begun to ease in the last six months, the Company has demonstrated its adaptability, resilience, and ability to generate significant cash. This performance supports our ongoing balanced approach to capital deployment, underpinned by the Investment Adviser’s extremely selective approach as it considers the strong pipeline of future opportunities, benefiting from ongoing strong market demand for infrastructure debt finance.
“The Board was delighted by the outcome of the Continuation Vote this summer. We take the 96.43% of votes cast in favour of the continuation of the Company as a strong endorsement of our strategy and a reflection of our commitment to active dialogue with shareholders. We continue our focus on addressing the discount to NAV at which shares currently trade and on delivering attractive and increasing returns to shareholders.”
Randall Sandstrom, Director and CEO/CIO, Sequoia Investment Management Company, said:
“While the global macroeconomic outlook is varied, there are reasons to be cautiously optimistic that we are entering a less volatile economic environment. Policy interest rates are beginning to fall and the economies of key markets such as the UK, Eurozone and US have continued to improve, although the US is expected to slow moderately. Our investment strategy remains focused on positioning the portfolio to deliver attractive and sustainable returns even should the environment not improve by maintaining the robust credit quality of our portfolio and investments in economic infrastructure assets with defensive characteristics.”