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Bid for John Laing Infrastructure is acting as a catalyst for renewed sector interest  
Thursday 19 Jul 2018 Author: Tom Sieber

The 145.2p per share cash takeover offer for John Laing Infrastructure (JLIF) on 16 July has renewed investor interest in a sector dogged by political risk of late.

Infrastructure as an asset class had been gaining greater traction over the last five years or so. It is relatively uncorrelated to the equity market and can provide a predictable stream of income, often rising ahead of inflation, over the long term.

However, in the UK a resurgent Labour party offered a threat to the whole concept of private money being invested in big public projects. Investors started to worry about what would happen to infrastructure funds should Labour win the next general election and share prices in the sector started to wobble.

The collapse of outsourcer Carillion in early 2018 helped fire these kinds of arguments as both JLIF and HICL Infrastructure Company (HICL) had direct exposure to Carillion’s facilities management contracts with health care assets.

Having traded at significant premiums to net asset value (NAV) for some time, infrastructure funds were suddenly trading at discounts
to NAV.

These discounts had then started to narrow and the potential acquisition of JLIF by Dalmore Capital and Equitix Investment Management, which would also include the payment of a 3.57p dividend upon the closing of the transaction, acted as a catalyst for these discounts to narrow further.

The transaction has not been recommended by the JLIF board yet, but the language of the statement suggests this takeover situation could be ‘when’ not ‘if’.

The offer price does not look massively generous at a 19.8% premium to net asset value, perhaps reflecting the ongoing political pressures in this space.

Emma Bird, research analyst at financial services firm Winterflood, notes that JLIF’s shares were trading at a 10% premium to NAV only 12 months ago. Therefore some investors may feel the takeover offer isn’t very generous.

However, she believes the majority of shareholders will welcome the potential cash offer, given the impact on the share price of not just this fund but others in the sector as well.

‘In a year of low returns, takeover bids are particularly welcome. John Laing Group, the fund’s investment manager, could well take a different view, not least as it received an investment fee of £12.6m from the fund in its last financial year.’

WHAT HAS HAPPENED TO THE OTHER INFRASTRUCTURE NAMES?

Both HICL Infrastructure and International Public Partnerships (INPP) rose sharply in response to the takeover news, while the likes of GCP Infrastructure (GCP), BBGI (BBGI) and 3i Infrastructure (3IN) also posted more modest gains.

The investment trust team at Numis note that other recent transactions have provided support to valuations, highlighting HICL’s sale of its interest in Highland Schools PPP2 project in Scotland in April 2018 at a 21% premium.

They comment: ‘While the offer is not yet formal, we believe the premium sets an interesting pricing precedent for the sector as a whole, and we believe that current prices offer an attractive buying opportunity. In addition, we believe that some of the other funds in the sector have higher quality portfolios.’

The bar chart, using data from Numis, compares the current share prices of selected infrastructure investment trusts compared with the implied share price at the 19.8% premium to NAV being offered for JLIF.

Winterflood’s Emma Bird says news of a potential bid is testament to the value that these funds offer at present.

She also believes the sector’s rating will be ‘materially stronger’ in the future because the JLIF approach illustrates there is value in the sector, particularly given the limited availability of the underlying assets. (TS)

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