From transition to implementation

John Laing Group 10 March 2021 Update
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John Laing Group

From transition to implementation

Preliminary results

Investment companies

10 March 2021

Price

316p

Market cap

£1,559m

Net debt (£m) at end FY20

Net debt (£m) including off-balance sheet

136

184

Shares in issue

493m

Free float

99%

Code

JLG

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(1.9)

(4.7)

(1.8)

Rel (local)

(4.4)

(8.0)

(14.5)

52-week high/low

373.2p

273.6p

Business description

John Laing Group is an originator, active investor in, and manager of greenfield infrastructure projects. It operates internationally and its business is focused on the transport energy, social and environmental sectors.

Next events

Q1 trading statement

April 2021

Analyst

Dan Gardiner

+44 (0)20 3077 5700

John Laing Group is a research client of Edison Investment Research Limited

John Laing Group’s (JLG) performance improved significantly in H2. Activity levels (short-listed positions, investments and realisations) all picked up and underlying NAV/share grew 5%. This rebound looks set to continue into FY21 as JLG implements its new strategy amid a resurging infrastructure market. Its greenfield business model gives investors a unique way to gain exposure to this growth. While foreign exchange headwinds may mask growth in underlying NAV/share in FY21, for FY22 we forecast a 7.6% total return (ie growth in NAV/share plus dividend).

Year end

NAV/share (p)

Diluted EPS*
(p)

DPS
(p)

P/NAV
(x)

P/E
(x)

Yield
(%)

12/19

337

20.2

9.5

0.94

15.6

3.0

12/20

310

(13.3)

9.7

1.02

N/A

3.1

12/21e

306

10.0

11.4

1.03

31.6

3.6

12/22e

317

18.9

8.8

1.00

16.7

2.8

Note: *EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

FY20: A year of transition

Following a weak H1 (see Reset and refocus) activity levels picked up in H2. JLG added four new shortlisted PPP positions, increased investments to £98m, disposed of its IEP East and Australian wind farm portfolio (total proceeds up to £580m), while underlying NAV/share grew 5% h-o-h. The geographic, sectoral and investment stage mix of the portfolio changed significantly over FY20 and new CEO Ben Loomes set out his Grow, optimise and enhance strategy.

FY21: A year of implementation

The focus in FY21 is executing this new strategy. JLG has already made key hires (including a new CFO) and secured its first two (exclusive) shortlisted positions for core-plus projects (in FTTH and accommodation). The company is also seeing activity in EV charging infrastructure and is progressing inbound interest in its current portfolio. Countries are raising investment to stimulate their economies post COVID-19, creating a ‘structurally favourable market for infrastructure’.

Forecast: FX masks progress in FY21; growth in FY22

We forecast a 4% increase in underlying NAV/share in FY21 primarily driven by further solid growth in the PPP portfolio. However, rebasing to current FX rates leads us to lower our headline FY21 NAV/share forecast to 306p (312p previously). Our FY21 dividend forecast of 11.4p is underpinned by £356m of net proceeds already secured. By FY22 we expect JLG’s new strategy to begin to accelerate growth. We introduce a headline FY22 NAV/share forecast of 317p, 7.6% underlying growth.

Valuation: Structural growth at a discount to peers

At 316p, JLG trades at 1.03x our rebased FY21 NAV/share forecast, a discount to both its historical (1.07x) and peer group average (1.16x) ratings. FY20 realisations underpin an FY21e yield of 3.6%. Adverse FX moves may obscure NAV/share progress in FY21 but JLG appears to be executing at pace in an infrastructure market that looks set to deliver sustained structural growth. JLG’s greenfield business model gives investors a unique way to gain exposure to these growth trends.

From transition to implementation

FY20: A year of transition

FY20 was a year of two halves for JLG. H1 saw underlying net asset value (NAV)/share fall 10%, predominantly due to the impact of falling power price forecasts on renewable valuations (see our note Reset and refocus). However, performance improved substantially in H2. Underlying NAV/share grew 5% (15p/share), largely due to the sale of IEP East for a c £88m (18p) premium to book value (before costs), partially offset by a further £18m (4p) decline in renewable valuations and £40m (8p) of costs. Excluding the uplift from IEP East, the value of the public-private partnership (PPP) portfolio increased by £53m (11p) in H2.

Exhibit 1: Underlying* NAV/share fell by 10% in H120

Exhibit 2: Underlying* NAV/share grew 5% in H220

Source: John Laing Group data. Note: *Excluding dividends, pension and FX. **PV = Change predominantly driven by portfolio valuation – costs.

Source: John Laing Group data. Note: *Excluding dividends, pension and FX. **PV = Change predominantly driven by portfolio valuation – costs.

Exhibit 1: Underlying* NAV/share fell by 10% in H120

Source: John Laing Group data. Note: *Excluding dividends, pension and FX. **PV = Change predominantly driven by portfolio valuation – costs.

Exhibit 2: Underlying* NAV/share grew 5% in H220

Source: John Laing Group data. Note: *Excluding dividends, pension and FX. **PV = Change predominantly driven by portfolio valuation – costs.

Activity levels also picked up substantially in H2. JLG added four shortlisted positions in PPP (SE Metro – Waste to Energy, Frankston Hospital, Ontario Line and Potrero Bus Yard) and secured two further exclusive positions in ‘core-plus’ projects, one in the UK (accommodation) and one in Europe (fibre to the home). Offsetting this, one shortlisted PPP project was cancelled, one faces increased uncertainty and two were won by competing consortiums. Investments increased to £98m (up from just £5m in H1) and JLG disposed of its IEP East and its Australian wind farm portfolio (gross proceeds of up to £422m and £158m respectively). The increased activity resulted in a substantial mix shift in JLG’s portfolio over the year. Renewables fell from 34% of portfolio value in FY19 to just 17% at end FY20 (Exhibit 3). European assets (excluding the residual IEP East stake) are now just 11% (previously 34%) and primary assets are just 22% (51% previously).

Exhibit 3: Significant mix shift in the portfolio in FY20

Exhibit 4: Total investments forecast by new/existing commitments vs pipeline and guidance

Source: John Laing Group data

Source: John Laing Group data. Note: AEP = aggregate equity positions.

Exhibit 3: Significant mix shift in the portfolio in FY20

Source: John Laing Group data

Exhibit 4: Total investments forecast by new/existing commitments vs pipeline and guidance

Source: John Laing Group data. Note: AEP = aggregate equity positions.

The arrival of Ben Loomes (CEO) in May was another significant development in FY20. His new ‘Grow, optimise, enhance’ strategy was laid out in a capital markets day in November and is discussed in detail in our recent Outlook note. It targets sustainable returns of 9–12% in the medium term, predominantly driven by 1) a decision to exit a declining PPP market in the UK and Europe, 2) re-investing cost savings to establish a core-plus strategy to accelerate growth and 3) further enhancing both operational and balance sheet efficiency using third-party capital. JLG has already begun to execute this strategy. The sharp reduction in both renewable and European PPP exposure during FY20 plus enlarging its stakes in the I-77 and Clarence Correctional Centre projects (in the United States and Australia respectively) are consistent with this new approach.

FY21: A year of implementation

The focus for JLG in FY21 is executing this new strategy. It has made several key hires in recent months including Rob Memmott (CFO), Christopher Reeves (ESG director), and Angenika Kunne (investment director – Core-Plus) and other senior hires are described as ‘well-progressed’.

A key priority is increasing the level of investment. JLG had already committed to invest £63m in FY21 entering the year. On top of this it is guiding to at least £100m in new commitments, implying a further £68m on top of £32m already committed to Pacifico 2 (Colombia). The aggregate value of the three preferred and short-listed PPP opportunities expected to reach financial close during FY21 (North-East Link, ViA15 and SR-400) is £106m. Adding £83m from the two core-plus projects, the total aggregate equity position of the pipeline is £189m. To meet its target effectively JLG has to close at least 36% (£68m/£189m) of its disclosed pipeline. We forecast £163m of investments in FY21 (Exhibit 4). The challenge for JLG will be increasing the pace of investment while maintaining discipline.

Further realisations are also expected. The agreed sales of IEP East (second tranche) and Australian wind farm assets should result in proceeds of £356m in FY21. In addition, JLG describes the current level of interest in its secondary assets as high. It has received a number of unsolicited approaches, some of which it is currently progressing. Our (arguably conservative) total realisations forecast of £400m, implies an additional £37m of disposals in FY21. We would expect progress on its commitment to exit its remaining renewable portfolio (£268m) by end FY22 during FY21.

The structural growth opportunity

JLG believes the encouraging rebound in activity levels that began in H220 presages a ‘structurally favourable market for infrastructure’. Countries are seeking to stimulate their economies through investment in infrastructure. The most obvious (and largest) example is Biden’s ‘Build Back Better’ programme in the US ($2tn over four years), but all of JLG’s key markets have laid out substantial infrastructure programmes in the last year (Exhibit 5).

Exhibit 5: Significant Infrastructure plans in JLG’s core markets

Country

Programme and comments

US

Second largest infrastructure market in the world

Significant investment gap: 2016–40 spend US$8.5tn; 45% more required to address under-investment

Biden & ‘Build Back Better’ – US$2tn over four years: highways, bridges, energy grids, schools, universal broadband

Australia

2016–40: total spend US$1.5tn underpinned by economic and demographic fundamentals

Federal government committed to investing A$110bn in infrastructure over the next decade; state budgets are even larger; New South Wales alone has an infrastructure pipeline of A$107bn over the next four years

UK & Europe

UK: £640bn of gross capital investment into infrastructure by the end of the current parliamentary term; National Infrastructure Strategy expected to focus on broadband, decarbonisation and transport

EU: €750bn Green Deal aimed at a greener, more inclusive, digital and sustainable Europe

Germany: €130bn stimulus programme including investment in sustainable mobility

Colombia & Peru

Colombia: further 4G road opportunities; 5G PPP programme US$9bn

Peru: updated US$5.4bn PPP pipeline announced in January 2020

Country

US

Australia

UK & Europe

Colombia & Peru

Programme and comments

Second largest infrastructure market in the world

Significant investment gap: 2016–40 spend US$8.5tn; 45% more required to address under-investment

Biden & ‘Build Back Better’ – US$2tn over four years: highways, bridges, energy grids, schools, universal broadband

2016–40: total spend US$1.5tn underpinned by economic and demographic fundamentals

Federal government committed to investing A$110bn in infrastructure over the next decade; state budgets are even larger; New South Wales alone has an infrastructure pipeline of A$107bn over the next four years

UK: £640bn of gross capital investment into infrastructure by the end of the current parliamentary term; National Infrastructure Strategy expected to focus on broadband, decarbonisation and transport

EU: €750bn Green Deal aimed at a greener, more inclusive, digital and sustainable Europe

Germany: €130bn stimulus programme including investment in sustainable mobility

Colombia: further 4G road opportunities; 5G PPP programme US$9bn

Peru: updated US$5.4bn PPP pipeline announced in January 2020

Source: John Laing Group FY20 presentation, slide 40 (March 2021)

The initial focus of JLG’s core-plus strategy is likely to be digital, particularly fibre-to-the-home (FTTH) infrastructure. In our recent Outlook note Grow, optimise and enhance, we assessed this opportunity in detail. Governments increasingly recognise the strategic imperative of 1Gbit/s connectivity and existing projects show customer adoption rates (and hence returns) are consistent and predictable (Exhibit 6). However, the company also highlighted that activity in energy transition, particularly around EV charging infrastructure, is picking up.

JLG has a strong balance sheet to execute on this opportunity. The £466m in available financial resources at the end of FY20 does not include the remaining £356m in net proceeds from the sale of IEP East and the Australian wind farm portfolio. In time JLG expects to attract third-party capital to both further accelerate its execution here and leverage its existing cost base.

Exhibit 6: Rising FTTH/B* penetration in Europe

Exhibit 7: FY21e NAV/share bridge*

Source: Edison Investment Research based on IDATE data for the FTTH Council Europe. Note: *FTTB = fibre to the building.

Source: Edison Investment Research. Note: *Cash dividend impact of 10p based on dividend payments expected in FY21 (not the FY21 declared dividend).

Exhibit 6: Rising FTTH/B* penetration in Europe

Source: Edison Investment Research based on IDATE data for the FTTH Council Europe. Note: *FTTB = fibre to the building.

Exhibit 7: FY21e NAV/share bridge*

Source: Edison Investment Research. Note: *Cash dividend impact of 10p based on dividend payments expected in FY21 (not the FY21 declared dividend).

Forecast: FX impacts in FY21; introducing FY22

The scope for valuation uplifts from both the discount rate unwinding and reductions in risk premia are likely to be less in FY21 than in previous years due to a smaller primary portfolio. Offsetting that, to some extent, a smaller, rebased renewable portfolio is likely to be less of a drag. We forecast a 4% underlying increase in NAV/share (excluding FX, pension and dividend payments) driven primarily by the PPP and projects portfolio (Exhibit 7). An FY21 dividend forecast of 11.4p is underpinned by the £356m in net proceeds from already agreed realisations.

However, foreign exchange rates have moved against JLG in FY21 so far. FX was a major driver of both H1 and H2 performance in FY20 (see Exhibits 1 and 2) and, with the full disposal of IEP East, an even larger share of assets will now be outside the UK. According to JLG at end FY20 a 1% move in the pound sterling has an impact of £11m on the portfolio valuation. Rebasing to current exchange rates reduces our underlying FY21 NAV/share forecast 7p and leads us to forecast reported FY21 NAV/share of 306p (vs 312p previously). The new CFO (Rob Memmott) is examining a hedging strategy that would reduce the exposure of the portfolio to FX and also tackle the volatility caused by shifts in the valuation of the pension fund.

We introduce an FY22 NAV forecast of 317p, based on 7.6% underlying (ie constant currency, pre-dividend) growth driven by greater investment activity and less renewable exposure. Our forecast is in line with JLG’s guidance of a ‘step-up in growth in 2022 towards our medium-term returns target range.’

Valuation: Structural growth at a discount to peers

At 316p, JLG’s shares 1.03x our rebased FY21e NAV/share forecast, a rating that stands at a discount to both its historical (1.07x) and peer group average (1.16x) ratings. FY20 realisations underpin an FY21 yield of 3.6%. Adverse FX moves may obscure NAV/share progress in FY21, but the company appears to be executing at pace in an infrastructure market that looks set to deliver sustained structural growth. JLG’s greenfield business model gives investors a unique way to gain exposure to these growth trends.

Exhibit 8: Financial summary

Accounts: IFRS, year-end: December, £m

 

2017

2018

2019

2020

2021e

2022e

INCOME STATEMENT

Total revenues

 

197

397

179

25

124

174

Cost of sales

 

0

0

0

0

0

0

Gross profit

 

197

397

179

25

124

174

SG&A (expenses)

 

(59)

(66)

(68)

(50)

(50)

(52)

Other income/(expense)

 

0

(21)

0

(28)

(17)

(17)

Depreciation and amortisation

 

0

0

0

(1)

0

0

Reported EBIT

 

138

310

111

(53)

57

105

Finance income/(expense)

 

(12)

(14)

(11)

(10)

(8)

(10)

Other income/(expense)

 

0

0

0

0

0

0

Reported PBT

 

126

296

100

(65)

49

94

Income tax expense (includes exceptionals)

 

2

0

0

(1)

0

0

Reported net income

 

128

296

100

(83)

49

94

Diluted average number of shares, m

 

372

475

496

497

497

500

Adjusted diluted EPS (p)

 

34.3

62.4

20.2

(13.3)

10.0

18.9

 

 

 

 

 

 

 

 

EBITDA

 

138

331

111

(24)

74

122

Adjusted NAV (p/share)

 

281

323

337

310

306

317

Adjusted Total DPS (p)

 

10.6

9.5

9.5

9.7

11.4

8.8

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

Property, plant and equipment

 

0

0

0

1

1

1

Goodwill

 

0

0

0

0

0

0

Intangible assets

 

0

0

0

0

0

0

Other non-current assets

 

1,347

1,700

1,914

1,687

1,506

1,633

Total non-current assets

 

1,347

1,700

1,914

1,688

1,507

1,634

Cash and equivalents

 

3

5.5

2

5

122

114

Inventories

 

0

0

0

0

0

0

Trade and other receivables

 

8

8

6

7

6

6

Other current assets

 

0

0

0

0

61

0

Total current assets

 

10

14

8

12

189

120

Non-current loans and borrowings

 

0

0

4

5

5

5

Trade and other payables

 

0

0

0

0

0

0

Other non-current liabilities

 

41

42

9

10

10

10

Total non-current liabilities

 

41

42

13

15

15

15

Trade and other payables

 

17

20

15

20

15

15

Current loans and borrowings

 

173

66

236

136

136

136

Other current liabilities

 

1

0

0

0

0

0

Total current liabilities

 

192

86

251

156

151

151

Equity attributable to company

 

1,124

1,586

1,658

1,529

1,530

1,588

Non-controlling interest

 

0

0

0

0

0

0

 

 

 

 

 

 

 

 

CASHFLOW STATEMENT

 

 

 

 

 

 

 

Profit before tax

 

126

310

111

(53)

57

105

Net finance expenses

 

12

0

0

0

0

0

Depreciation and amortisation

 

0

0

0

1

0

0

Share based payments

 

3

3

4

1

0

0

Fair value and other adjustments

 

(190)

(369)

(174)

(39)

(142)

(191)

Movements in working capital

 

2

2

(2)

3

(5)

10

Cash from operations (CFO)

 

(47)

(54)

(61)

(87)

(90)

(77)

Capex

 

(0)

0

0

(1)

0

0

Cash transf. from inv. Held at FV

 

(2)

58

74

61

0

0

Portfolio Investments - Disposals

 

79

(46)

(124)

189

237

(25)

Cash used in investing activities (CFIA)

 

77

12

(50)

249

237

(25)

Net proceeds from issue of shares

 

0

210

(4)

0

0

0

Movements in debt

 

11

(106)

169

(101)

0

0

Other financing activities

 

(40)

(59)

(58)

(58)

(31)

94

Cash from financing activities (CFF)

 

(29)

45

107

(159)

(31)

94

Currency translation differences and other

 

0

0

0

0

0

0

Increase/(decrease) in cash and equivalents

 

1

3

(4)

3

117

(8)

Currency translation differences and other

 

0

0

0

0

0

0

Cash and equivalents at end of period

 

3

6

2

5

122

114

Net (debt)/cash

 

(171)

(60)

(238)

(136)

(19)

(27)

Movement in net (debt)/cash over period

 

(11)

111

(178)

102

117

(8)

Source: Company accounts, Edison Investment Research (based on JLG’s statutory accounts


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This report has been commissioned by John Laing Group and prepared and issued by Edison, in consideration of a fee payable by John Laing Group. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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General disclaimer and copyright

This report has been commissioned by John Laing Group and prepared and issued by Edison, in consideration of a fee payable by John Laing Group. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

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Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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