Project investment delivers growth

John Laing Group 10 September 2018 Outlook
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John Laing Group

Project investment delivers growth

H118 results

Investment companies

10 September 2018

Price

313.0p

Market cap

£1,536m

Net cash (£m) at 30 June 2018
(company definition)

234

Shares in issue

490.8m

Free float

100%

Code

JLG

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

10.2

8.3

16.8

Rel (local)

16.0

14.3

17.7

52-week high/low

316.2p

239.9p

Business description

John Laing 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

Pre-close update

December 2018

Analyst

Graeme Moyse

+44 (0)20 3077 5700

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

Continuity of strategy and personnel has enabled John Laing Group (JLG) to capitalise on the opportunities in the international market for infrastructure investment and establish an impressive track record of growth. With the demand for infrastructure projects remaining strong, we believe JLG is well placed financially, operationally and competitively to deliver attractive returns to shareholders.

Year end

NAV/share

(p)

EPS*
(p)

DPS*
(p)

P/NAV
(x)

P/E
(x)

Yield
(%)

12/17

281

31.9

8.9

1.1

9.8

2.8

12/18e

318

57.3

9.2

1.0

5.5

2.9

12/19e

354

46.3

9.4

0.9

6.8

3.0

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. The 8.9p DPS figure for FY17 includes an interim dividend adjusted for the rights issue.

H1 growth exceeds expectations

JLG’s H118 results demonstrated the continuing growth of the business post the March rights issue. The all-important NAV per share rose from 281p at FY17 to 307p, an increase of 9.3% (Edison last published FY18 forecast: 303p). The significant fair value (FV) movement of £193.9m was helped by a contribution from the disposal of JLG’s remaining 15% of the Intercity Express project (IEP Phase 1) at above book value but also benefitted from a change in operational discount rates (£43.2m). The unwinding of discounting (£47.8m) and reductions in construction premiums (£23.2m), embedded value within the portfolio, also contributed significantly to the FV movement. The IAS 19 pension gain, which we had not included in our forecasts, added 6p/share to NAV growth. DPS increased 2.9% to 1.80p per share. In total, JLG has achieved a CAGR in NAV per share, including dividends, of 15.5% in the period 2015–2017.

JLG well placed to exploit market opportunities

The key drivers for infrastructure investment remain in place: population growth, urbanisation and tightening environmental standards. JLG is positive on the outlook, particularly in North America, and the pipeline of potential investment opportunities now stands at £2,300m (75 projects) (+7% vs FY17 £2,150m). Of the total pipeline, JLG classifies c £500m as short- to medium-term opportunities, split c £325m Public Private Partnership (PPP) and £186m renewable energy. Demand for secondary assets also remains strong, enabling JLG to preserve the yield shift.

Valuation: Premium to NAV; discount to peers

After the recent strong performance, JLG’s shares trade at a small premium (c 2%) to the H118 NAV per share of 307p. The share price is now broadly in line with our revised FY18 forecast NAV per share of 318p. However, despite its recent strong run, JLG stands at a discount to peer group averages (c 8% premium). At a 8% premium to H118 NAV per share of 307p, JLG would be worth c 332p/share. Given the undemanding relative rating, proven track record of growth and the prospect of continuing increases in the NAV per share and DPS, we believe JLG offers the potential for attractive returns for investors.

Investment summary

Company description: Originator and investor in infrastructure projects

JLG originates, invests in and manages portfolios of infrastructure projects. The business operates in selected geographical markets – Asia-Pacific, North America and Europe – and is focused on the transport, environmental and social sectors. At 30 June 2018, the value of the investment portfolio of 41 projects, and JLG’s 2.4% holding in JLEN was valued at £1,259.7m. The assets are split between projects under construction, primary (c 50.5%), and operational projects, secondary (c 49.5%). JLG has separately listed two funds on the London Stock Exchange: John Laing Environmental Assets (JLEN in 2014) and John Laing Infrastructure Fund (JLIF in 2010). JLG retains c 2.4% of JLEN.

Valuation: Small premium to historic NAV per share

After the recent strong performance, the shares are trading at a small premium (c 2%) to the H118 NAV per share of 307p, (average 2015–18 of -4%; maximum +12%, minimum -18%). The valuation is broadly in line with our revised FY18e forecast NAV per share of 318p (Exhibit 3). However, despite its recent strong run JLG stands at a discount to peer group averages (c 8% premium). At a 8% premium to the last disclosed NAV per share of 307p JLG would be worth c 332p/share. Given the relative rating, proven track record of growth and the prospect of continuing increases in the NAV per share and DPS, we believe JLG continues to offer potentially attractive returns to investors.

Further growth in portfolio valuation expected

We set out our assumptions for the movement in the basic components of the portfolio value in Exhibit 1. We also show our revised assumptions for growth in NAV per share and DPS. Following the recent strong H118 results, we have increased our forecast for NAV per share growth (Exhibit 3). The increase, in large part, reflects an assumption of a greater FV movement.

Exhibit 1: Movements in portfolio value, NAV and DPS

£m

2016

2017

2018e

2019e

2020e

Opening value

841.4

1,175.9

1,193.8

1,460.1

1,678.7

Cash invested

301.5

209.9

250.0

250.0

250.0

Cash yield

(34.8)

(40.2)

(49.2)

(56.5)

(64.8)

Investment realisations

(146.6)

(312.5)

(250.0)

(250.0)

(250.0)

Asset transfers

0.0

0.0

0.0

0.0

0.0

Rebased asset value

962

1,033

1,144.6

1,403.6

1,613.8

Total FV movement

214.4

160.7

315.5

275.1

311.5

Closing value

1,175.9

1,193.8

1,460.1

1,678.7

1,925.3

NAV (p/share)

254

281

318

354

397

DPS (p/share)

8.15

8.9*

9.2

9.4

9.6

Source: Edison Investment Research. Note: *The DPS figure for FY17 includes an interim figure adjusted for the rights issue bonus factor.

Sensitivities: Discount rates and foreign exchange remain key

JLG’s business remains sensitive to changes in discount and foreign exchange rates.

Portfolio valuation: JLG has stated that a 0.25% increase in the discount rate applied to the DCF valuation of its projects would reduce the value of the investment portfolio by £42.6m.

Foreign exchange: JLG has stated that, prior to hedging, +/- 5% in the value of sterling against the relevant currencies would result in a c £40m decline/increase in the value of the portfolio.

Financial and intellectual capital

With a strong presence in its key markets, a long track record of successful investment, a strong investment pipeline and a balance sheet reinforced by the proceeds of a recent rights issue, we believe JLG is well placed to continue its strategy of growth and returns for shareholders.

H118 results

JLG’s H118 results demonstrated the continuing growth of the business post the March rights issue.

The all-important NAV rose from 281p (306p restated for the rights issue) to 307p, an increase of 9.3%. The NAV per share exceeded our forecast for FY18 of 303p. The principal components of the movement in the NAV can be seen in Exhibit 2. The significant FV movement (£193.9m) was helped by the disposal of JLG’s remaining 15% of the InterCity Express Programme (IEP Phase 1) in May. The project was sold for £232m, above book value, and JLG has disclosed that the net benefit from value enhancements and other changes, of £86.3m, was primarily due to the gain on the disposal of IEP Phase 1. JLG also benefited from a change in operational discount rates, which totalled £43.2m of the £193.9m. Overall, the weighted average discount rate fell to 8.7% from 8.8% as at 31 December 2017. As always, the unwinding of discounting (£47.8m) and reductions in construction premiums (£23.2m), embedded value within the portfolio, contributed significantly to the FV movement. The IAS 19 pension gain, which we had not included in our forecasts, added 6p/share to NAV growth.

Exhibit 2: Principal components of NAV growth in H118 (p/share)

(£m)

Opening
value

Rights
issue

FV move
of portfolio

IAS 19
pension gain

Other P&L
items

Dividends
paid

Closing
value

NAV

306

(34)

40

6

(4)

(7)

307

Source: John Laing Group

The other important benchmark, DPS, increased 2.9%, to 1.80p per share (from the rebased 1.75p per share). In total, JLG has achieved a CAGR in NAV per share, including dividends, of 15.5% in the three years to the end of December 2017.

Following the results, we have revised our forecasts for FY18 and beyond. The details are set out in the financial section of this report, but the principal changes are shown in the table below.

Exhibit 3: Forecast revisions 2018–20e

Old

New

Change

NAV

EPS

DPS

NAV

EPS

DPS

NAV

EPS

DPS

p/share

p/share

p/share

p/share

p/share

p/share

%

%

%

2018e

303

40.6

9.2

318

57.3

9.2

5.0

41.1

0.0

2019e

338

44.4

9.4

354

46.3

9.4

4.7

4.3

0.0

2020e

378

49.9

9.6

397

52.2

9.6

5.0

4.6

0.0

Source: Edison Investment Research

Portfolio analysis

Exhibits 4 to 7 show the investment portfolio split. In particular, we would point to the relatively smaller portion of the portfolio now invested in the UK. In addition, it is worth noting the five largest investments now comprise c 41.3% of the portfolio (FY17 39.3%).

Exhibit 4: Portfolio by revenue (30 June 2018)

Exhibit 5: Portfolio by investment stage (30 June 2018)

Source: John Laing Group

Source: John Laing Group

Exhibit 6: Portfolio by sector (30 June 2018)

Exhibit 7: Portfolio by geography (30 June 2018)

Source: John Laing Group

Source: John Laing Group

Exhibit 4: Portfolio by revenue (30 June 2018)

Source: John Laing Group

Exhibit 6: Portfolio by sector (30 June 2018)

Source: John Laing Group

Exhibit 5: Portfolio by investment stage (30 June 2018)

Source: John Laing Group

Exhibit 7: Portfolio by geography (30 June 2018)

Source: John Laing Group

Of the 10 largest investments, only three are located in the UK: IEP Phase 2, Cramlington Biomass and Manchester Waste Thermal Power Station. JLG has published book value ranges for each of its five largest primary and secondary investments, shown in Exhibit 8.

Exhibit 8: Valuation of JLG’s five largest primary and secondary investments

Phase

Project

Value

Primary

IEP Phase 2

> £225m

Primary

Denver Eagle P3

£75m - £100m

Primary

Sydney Light Rail

£50m - £75m

Primary

New Generation Rollingstock

£25m - £50m

Primary

Cramlington Biomass

£25m - £50m

Secondary

Rocksprings Wind Farm

£50m - £100m

Secondary

New Royal Adelaide Hospital

£50m - £75m

Secondary

Buckthorn Wind Farm

£50m - £75m

Secondary

Manchester Waste TPS Co

£50m - £75m

Secondary

Klettwitz Wind Farm

£25m - £50m

Source: John Laing Group

Rights issue

In March 2018, JLG launched a one for three rights issue at 177p (issuing 122.32m shares) to raise £210m net of cost. A relatively heavy share issue, the price was deeply discounted (c 26.8% to the theoretical ex-rights price).

The rationale for the issue was to enable JLG to increase the scale of its operations and to take advantage of the higher proportion of attractive investment opportunities that were now available to it, as its relationship with partners and other developers strengthened. Although JLG raised capital at the time of its IPO in 2015, the scale of the opportunities, particularly in the US, has exceeded expectations.

JLG’s corporate philosophy has been to adhere to a self-funding model, whereby new investment commitments are financed through operational cash flow and investment realisations. At the time of its rights issue, JLG reiterated its belief in the self-funding model but in recent years (Exhibit 9) investment commitments have generally far outstripped realisations. However, H118 results highlighted the volatility of this trend with realisations of £241.5m, in large part due to the disposal IEP Phase 1 (£232m), far outstripping new investment commitments of £39.2m. It is conceivable that a parity of commitments and realisations can be achieved, although we view this as more likely to be in the long term given the current strength of global infrastructure markets.

Exhibit 9: JLG investment commitments vs realisations 2014–17 (£m)

2014

2015

2016

2017

Total

New investment commitments

217.2

180.5

181.9

382.9

962.5

Realisations

198.5

86.3

146.6

289.0

720.4

Source: John Laing Group

Business model

JLG’s business model is based on its investment origination and asset management capabilities. Initial value is created through establishing greenfield infrastructure projects, while additional value is derived from enhancing each project’s cash flow via efficiency improvements and cost optimisation and also from de-risking the projects. Between 31 December 2014 and 31 December 2017, JLG made 28 new investments and disposed of 21 projects. Effective implementation of the model is based on the integration of the project origination and asset management business, JLG’s independent status allowing it to forge wide-ranging alliances with other market participants and the group’s intellectual capital based on its extensive network acquired through deals in different geographies and sectors over a long timeframe. JLG’s expertise and market presence has allowed it to build a strong track record of growth and an extensive investment pipeline. Given JLG’s experience of different geographies and asset types and the existence of long-term relationships with other investors and contacts, we believe it is a business model that it would be difficult for competitors to replicate.

The importance of embedded growth

For JLG the key measurement of how successful it has been in developing its business model and implementing its strategy is growth in the DPS and NAV per share. In the period 2015–17 JLG has achieved a CAGR of 15.5% in NAV per share (including DPS). Exhibit 10 shows that JLG has posted impressive growth in several key benchmarks.

Exhibit 10: Progression of operational benchmarks (2012–17)

(£m)

2012

2013

2014

2015

2016

2017

CAGR

Pipeline (PPP only)

925.0

986.0

1,067.0

1,135.0

1,408.0

1,585

11.4%

Total portfolio value

575.9

684.8

772.4

902.8

1,175.9

2,150

15.7%

NAV

437.0

528.0

649.8

889.6

1,016.8

1,124

20.8%

Source: John Laing Group

The evolution of the portfolio is the key determinant of NAV per share. While new investment and realisations play an important role in determining the portfolio value, the NAV is also significantly influenced by FV adjustments (see Exhibit 1).

It is worth reiterating that an important part of the overall FV movement relates to the embedded value and is generated by the twice-yearly updating of a project’s DCF. The two principal constituents of embedded growth (reduction of construction risk and the unwinding of the discount rate) contribute significantly to the overall FV movement (on average more than 60% of total FV movement in the last four years). In addition to FV movements, JLG generates cash flow from the cash yield on the secondary portfolio and fee income generated by JLCM for the provision of asset management services. In the next section we examine the role of JLCM.

JLIF, JLEN, investment management services and first offer

Although JLG itself only returned to the market in 2015, in the five years prior to its own flotation it listed two separate funds on the market, JLIF in 2010 and JLEN in 2014. JLG no longer has any holding in JLIF but it retains a small number of shares in JLEN (£9.7m c 2.4% as at 30 June 2018). However, JLG does provide investment management services (through John Laing Capital Management) to the two funds and retains a first-offer arrangement for certain types of asset disposal with JLIF and JLEN.

In the case of investment management services JLG generates a management fee based on a percentage of external assets under management (£1,649m at December 2017; £1,808.1m at H118). In 2017 JLG generated revenue, from external assets under management, of £16.7m, equivalent to 1.01% of year-end funds under management. In H118, investment management revenue totalled £9.4m, primarily from JLIF and JLEN, but also including some director fees.

In addition to the provision of investment management services, JLG has first-offer agreements with JLIF and JLEN, covering certain types of asset disposals, including rail, road and accommodation. However it is important to stress that the first-offer agreements with JLIF and JLEN do not require JLG to sell to the two funds. In 2014–17, approximately 70% of assets (by sale proceeds) were acquired by JLIF and JLEN. According to JLG, between 31 December 2014 and 31 December 2017, it made 21 divestments of entire or part interests in its investment portfolio, predominantly of investments from within its secondary investment portfolio. Exhibit 11 below shows the percentage of assets sold to either JLIF or JLEN. Significantly, the two largest disposals in 2017 and 2018, including the recent IEP Phase 1, were made to third parties. However, with JLG’s declining UK investment base and JLIF’s UK focus, the proportion sold to JLIF and JLEN might be expected to decline. We do not expect JLG’s ability to divest assets to be significantly affected by the potential loss of a first-offer agreement with JLIF.

Exhibit 11: Divestments to JLIF and JLEN

£m

2015

2016

2017

PPP divestments by JLG

15

90

246

Acquisitions by JLIF

12

90

103

Acquisitions by JLIF (%)

80%

100%

42%

RE divestments by JLG

72

50

43

Acquisitions by JLIF

72

50

43

Acquisitions by JLIF (%)

100%

100%

100%

Source: John Laing Group

In light of JLIF’s recent recommendation to shareholders to accept the offer from Dalmore Capital and Equitix Investment Management, which is expected to become effective this autumn, we set out the basis of JLG’s relationships with JLIF and JLEN and the terms of the agreements. The investment management agreement can be terminated by either party, with a one-year notice period. JLIF can also terminate in six months, with the payment of an additional six months of fees. The first-offer agreement relating to non-rails assets can also be terminated by either party, giving one year’s notice, or if the JLIF investment advisory agreement has already been terminated, with a 45-day notice period. The first-offer agreement related to rail assets can only be terminated in the event of a material breach of the agreement or in the event of insolvency.

If the proposed offer for JLIF proceeds as expected, there is a possibility that both the investment advisory agreements and the first-offer agreement will be terminated. The immediate revenue impact would be the loss of the investment management fee relating to JLIF. Given the asset split between JLIF and JLEN (broadly 75/25%), we would estimate the revenue lost to be in the region of £14.3m (75% of £19m) on annual basis, equivalent to c 3p/share. However, we would also expect some reduction in costs resulting from any changes. The impact of the absence of a first-offer agreement with JLIF is harder to evaluate. Given the boards of JLIF and JLEN are free to choose whether to make an offer for any particular asset, there is no reason to suppose they have systematically overbid for assets and the premiums paid have not been out of line with that achieved by JLG’s sales to third parties.

Exhibit 12: Growth in external assets under management and associated fee income

£m

2014

2015

2016

2017

External AUM (year-end)

1,019.9

1,136.4

1,472.0

1,648.5

External AUM (average)

908.0

1,078.2

1,304.2

1,560.3

Growth in AUM (%)

28%

11%

30%

12%

Fees From AMS/AUM (%)

1.1%

1.1%

1.1%

1.2%

Source: John Laing Group

UK concerns offset by increasing internationalisation

Despite the uncertainty surrounding JLIF, JLG’s share price has recovered lost ground in recent months after a period of weakness in the second half of 2017 and the beginning of 2018 related to adverse newsflow in the UK. As we highlighted in a previous report, in September 2017 the Labour Party indicated that if it were to form the next government it would ‘abandon PFI as a tool for future infrastructure investment’ and ‘bring in-house existing PFI projects’. JLG has not quantified, publicly at least, the impact of any changes to the PFI but we have calculated previously the impact would likely to be less than 5p per share. We believe that given the reduced percentage of the portfolio invested in the UK (30.6% 30 June 2018, versus 33.9% 31 December 2017) and the small proportion of the pipeline (less than 5% of the PPP pipeline) focused on the UK, this will not act as a significant impediment to future growth at JLG.

Market outlook

We have written previously (JLG: positive outlook for growth) about the positive trends in the global market for infrastructure and renewable energy. We believe the key drivers of population growth, urbanisation and tightening environmental standards remain in place. Historic underinvestment in infrastructure assets over the last 10 years (since the financial crash) has only increased the pressure for investment. In addition, we believe the falling costs of wind and solar generation will lead to renewable energy taking an increasingly large share of investment in new generation capacity. JLG remains positive on the general outlook and the pipeline of potential investment opportunities now stands at £2,300m (75 projects) (+c 7% versus FY17 £2,150m). In particular, JLG sees significant opportunities in the US and parts of Europe, although the outlook for the UK appears less favourable (the UK now accounts for less than 5% of the PPP investment pipeline).

Of the total pipeline, JLG regards c £500m as short- to medium-term opportunities, split c £325m PPP (12 opportunities) and £186m renewable energy (six opportunities). Of the 12 PPP projects, 10 are located in North America and two in Europe (one in the UK). The six renewable energy projects are split: Europe four, Asia Pacific one and North America one.

Exhibit 13: JLG investment pipeline H118 by region (£m)

Exhibit 14: JLG investment pipeline H118 by sector (£m)

Source: John Laing Group

Source: John Laing Group

Exhibit 13: JLG investment pipeline H118 by region (£m)

Source: John Laing Group

Exhibit 14: JLG investment pipeline H118 by sector (£m)

Source: John Laing Group

According to JLG, the market for secondary assets remains strong and the yield shift between primary and secondary assets remains attractive.

Management

Phil Nolan, chairman since 2010, stepped down at the AGM in May and has been replaced by Will Samuel, who originally joined the board as chairman designate in December 2017. Mr Samuel is also chairman of Tilney Group and was previously chairman of TSB, Howdens Joinery and Ecclesiastical Insurance Group. Andrea Abt, who brings experience of a variety of senior functional roles, also joined as a non-executive director following the AGM. However, there were no changes to the executive membership of the board of directors over the last year. Olivier Brousse remains chief executive officer (since 2014) and Patrick O’D Bourke continues as group finance director (since 2011). There were also no changes to the ranks of the non-executive directors during the year. In addition to Will Samuel, five other non-executive directors (following the appointment of Andrea Abt) sit on the board of the company.

Sensitivities

The investment portfolio remains the chief store of value within JLG and in the following section we examine some of the principal determinants of value.

The portfolio valuation (and hence the NAV) is sensitive to the forecast of cash flows, tax rates and regulation of each individual project. A reduction in the construction of infrastructure projects (primary investment) by the public sector, or in the appetite of the secondary market for the acquisition of operational assets, would pose a threat to JLG’s business model. The portfolio valuation is also sensitive to discount rates and foreign exchange rates, which we examine separately below.

Discount rate: JLG has stated that a 0.25% rise in the discount rate used in the DCF valuation of its projects, versus the weighted average discount rate of 8.7% as at 30 June, would reduce the value of the investment portfolio by £42.6m. A 0.25% reduction in the discount rate applied would increase the portfolio value by c £44.8m.

Foreign exchange: c 70% of JLG’s investment portfolio is invested in currencies other than sterling (A$, NZ$, US$, €). The portfolio is therefore sensitive to the sterling exchange rate and according to JLG, a ± 5% movement in sterling would decrease/increase the portfolio valuation by c £40m.

Power price forecasts: JLG has stated that a 5% increase/decrease in power price forecasts is estimated to increase or decrease the total portfolio valuation by £9.4/9.5m.

DPS: a portion of our projected DPS payment is based on a forecast for the special payment, which in turn is dictated by investment realisations in the relevant period. An increase in investment realisations in FY18, from £250m to £300m, would increase our forecast for the special dividend from 3.82p to 4.58p, but would reduce the forecast NAV per share by c 1p.

Valuation

NAV per share remains the principal benchmark for evaluating JLG’s share price. As we have already seen, JLG has achieved significant growth in its NAV per share in recent years and we expect continued growth in the forecast period. Despite the steady increase in NAV, the shares have fluctuated between a discount to a small premium to NAV per share (Exhibit 15).

Exhibit 15: JLG share price versus NAV per share

Source: Bloomberg, John Laing Group, Edison Investment Research

After the recent strong performance, the shares are trading at a small premium (c 2%) to H118 NAV per share of 307p, (average 2015–18 of -4%; maximum +12%, minimum -18%). The valuation is broadly in line with our revised FY18e forecast NAV per share of 318p.

Exhibit 16: Valuation metrics for key comparable companies

 Company

 

Price

(p/s)

Shares (m)

Mkt cap

(£m)

Yield

(%)

Last reported NAV

(p/date)

Premium

(%)

Infrastructure

3I Infrastructure Group

3IN

243.0

810.4

1,969.3

3.7

211.0

29/03/18

15

Bilfinger Berger G/I.

BBGI

145.0

529.2

767.3

4.6

132.7

29/06/18

9

GCP Infrastructure Investments

GCP

122.2

874.7

1,068.9

6.2

113.2

29/06/18

8

HICL Infrastructures

HICL

155.3

1,800.0

2,795.4

5.1

149.6

29/03/18

4

International Public Partnerships

INPP

154.9

1,400.0

2,168.6

4.4

146.3

29/06/18

6

John Laing Infrastructure

JLIF

141.8

991.1

1,405.4

4.8

130.0

29/06/18

9

Weighted average Infrastructure

 

 

 

 

4.7

 

 

8

Renewables

Bluefield Solar Income

BSIF

118.0

369.9

436.5

5.9

112.8

29/03/18

5

Foresight Solar

FSFL

109.0

450.0

490.5

5.9

104.9

18/05/18

4

Greencoat UK Wind

UKW

127.6

1,120.0

1,429.1

5.2

114.1

29/06/18

12

John Laing Env. Assets

JLEN

108.0

394.1

425.6

5.9

99.6

29/06/18

8

NextEnergy Solar Fund

NESF

109.5

577.9

632.8

5.9

105.1

29/03/18

4

The Renewables Infrast. Grp

TRIG

111.0

1,101.6

1,222.8

5.9

105.2

30/06/18

6

Weighted average Renewables

 

 

 

 

5.7

 

 

7

Total weighted average

 

 

 

 

5.0

 

 

8

John Laing Group

JLG

313.0

490.8

1,536.2

 

307

30/06/2018

2

Source: Bloomberg, Edison Investment Research. Note: Priced at 7th September 2018.

Exhibit 16 highlights that JLG, despite its recent strong run, stands at a discount to peer group averages (c 2% premium versus sector average premium of 8%). At a 8% premium to the last disclosed NAV per share of 307p, JLG would be worth c 332p/share. Despite the recent strong performance of the shares, given the relative rating, proven track record of growth and the prospect of continuing increases in the NAV per share and DPS, we believe JLG offers potentially attractive returns for investors.

Financials

Below we set out the principal assumptions that underpin our forecasts.

Investments: we assume new investments of c £250m for FY18, FY19 and FY20 (guidance for FY18 £250m, H118 £39.2m, average 2014–17 c £200m).

Realisations: we forecast investment realisations of £250m in FY18, FY19 and FY20 (guidance for FY18 £250m, H118 £242m, average 2014–17 c £180m).

Cash yield and FV adjustments: we use an assumed yield of 6.6% (of average secondary portfolio value) to calculate the cash yield for FY18 of £49.2m, £56.5m for FY18 and £64.8m in FY20 (FY17: £40.2m). We forecast FV adjustments for FY18 of £315.5m, £275.1m for FY19 and £311.5m in 2020 (FY17 £160.7m, H118 £193.9m).

IMS income: despite the current offer for JLIF, we continue to forecast investment management fees for both JLIF and JLEN. We assume investment management fees of £19m in FY18, £20.2m in FY19 and £20.8m in FY20. It is worth noting that c 75% of the fees relate to services provided to JLIF but, in the event of the loss of this revenue, we would expect some reduction in costs related to the provision of these services.

Administration costs: we assume administration costs of £66.0m in FY18 (FY17 £58.9m) £67.3m in FY19 and £68.7m in FY20.

Pension contributions: despite the IAS 19 surplus, we forecast continuing contributions of £26.5m in FY18, £29.1m in FY19 and £24.9m in FY20.

Tax: we assume minimal/no tax provisions in FY18, FY19 and FY20 (H118 £0.4m).

DPS: JLG’s policy is to increase the ordinary DPS ‘at least in line with inflation’. JLG also aims to pay a special dividend equivalent to 5–10% of the gross proceeds from the sale of investments. For FY18 we forecast a DPS of 9.2p, 9.4p for FY19 and 9.6p for FY20. Our forecasts are based on a 3% annual increment in the ordinary DPS. For our special dividend forecast, we assume a payout equivalent to 7.5% of our assumptions for realisations (see above).

Exhibit 17: Financial summary

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

 

 

2017

2018e

2019e

2020e

Total revenues

 

 

196.7

346.2

307.0

344.0

Cost of sales

 

 

0.0

0.0

0.0

0.0

Gross profit

 

 

196.7

346.2

307.0

344.0

SG&A (expenses)

 

 

(58.6)

(65.8)

(67.1)

(68.5)

Other income/(expense)

 

 

0.0

0.0

0.0

0.0

Depreciation and amortisation

 

 

(0.3)

(0.2)

(0.2)

(0.2)

Reported EBIT

 

 

137.8

280.2

239.7

275.3

Finance income/(expense)

 

 

(11.8)

(12.3)

(12.7)

(16.2)

Other income/(expense)

 

 

0.0

0.0

0.0

0.0

Reported PBT

 

 

126.0

267.9

226.9

259.1

Income tax expense (includes exceptionals)

 

 

1.5

(0.5)

(0.4)

(0.5)

Reported net income

 

 

127.5

267.4

226.5

258.6

Basic average number of shares, m

 

 

367.0

466.9

490.8

490.8

Adjusted EPS (p)

 

 

31.9

57.3

46.3

52.2

EBITDA

 

 

138.1

280.4

239.9

275.5

Adjusted NAV (p/share)

 

 

281

318

354

397

Adjusted Total DPS (p)

 

 

8.9*

9.2

9.4

9.6

BALANCE SHEET

 

 

 

 

 

 

Property, plant and equipment

 

 

0.1

0.4

0.7

1.0

Goodwill

 

 

0.0

0.0

0.0

0.0

Intangible assets

 

 

0.0

0.0

0.0

0.0

Other non-current assets

 

 

1,346.9

1,629.2

1,876.0

2,147.6

Total non-current assets

 

 

1,347.0

1,629.6

1,876.7

2,148.6

Cash and equivalents

 

 

2.5

10.9

18.9

5.1

Inventories

 

 

0.0

0.0

0.0

0.0

Trade and other receivables

 

 

7.6

14.2

12.6

14.1

Other current assets

 

 

0.0

0.0

0.0

0.0

Total current assets

 

 

10.1

25.2

31.5

19.2

Non-current loans and borrowings

 

 

0.0

75.0

150.0

200.0

Trade and other payables

 

 

0.0

0.0

0.0

0.0

Other non-current liabilities

 

 

41.3

1.0

1.0

1.0

Total non-current liabilities

 

 

41.3

76.0

151.0

201.0

Trade and other payables

 

 

17.3

17.3

17.3

17.3

Current loans and borrowings

 

 

173.2

0.0

0.0

0.0

Other current liabilities

 

 

1.4

1.4

1.4

1.4

Total current liabilities

 

 

191.9

18.7

18.7

18.7

Equity attributable to company

 

 

1,123.9

1,560.4

1,738.8

1,948.4

Non-controlling interest

 

 

0.0

0.0

0.0

0.0

CASH FLOW STATEMENT

 

 

 

 

 

 

Profit before tax

 

 

126.0

267.9

226.9

259.1

Net finance expenses

 

 

11.8

12.3

12.7

16.2

Depreciation and amortisation

 

 

0.3

0.2

0.2

0.2

Share based payments

 

 

3.2

0.0

0.0

0.0

Fair value and other adjustments

 

 

(270.6)

(342.0)

(304.2)

(336.4)

Movements in working capital

 

 

2.9

(36.4)

2.6

(1.6)

Cash from operations (CFO)

 

 

(126.4)

(98.5)

(62.2)

(62.9)

Capex

 

 

(0.1)

(0.5)

(0.5)

(0.5)

Cash transf. from inv. Held at FV

 

 

77.4

49.2

56.5

64.8

Portfolio Investments - Disposals

 

 

79.1

0.0

0.0

0.0

Cash used in investing activities (CFIA)

 

 

156.4

48.7

56.1

64.4

Net proceeds from issue of shares

 

 

0.0

210.4

0.0

0.0

Movements in debt

 

 

11.0

(98.2)

75.0

50.0

Other financing activities

 

 

(40.1)

(53.9)

(60.9)

(65.2)

Cash from financing activities (CFF)

 

 

(29.1)

58.3

14.1

(15.2)

Currency translation differences and other

 

 

0.0

0.0

0.0

0.0

Increase/(decrease) in cash and equivalents

 

 

0.9

8.4

8.0

(13.8)

Currency translation differences and other

 

 

0.0

0.0

0.0

0.0

Cash and equivalents at end of period

 

 

2.5

10.9

18.9

5.1

Net (debt) cash

 

 

(170.7)

(64.1)

(131.1)

(194.9)

Movement in net (debt) cash over period

 

 

(10.9)

106.6

(67.0)

(63.8)

Source: Company accounts, Edison Investment Research. Note: *The 8.9p DPS figure for FY17 includes an interim dividend adjusted for the rights issue.

Contact details

Investment portfolio by geography

1 Kingsway
London WC2B 6AN.
United Kingdom
+44 (0) 20 7901 3200
www.laing.com

Management team

Chairman: Will Samuel

Chief executive officer: Olivier Brousse

Will Samuel joined John Laing in December 2017 and took over as chairman in May 2018 after AGM. Mr Samuel is also chairman of Tilney Group and previously was chairman of TSB Bank, Howdens Joinery Group, Ecclesiastical Insurance Group and H P Bulmer. Mr Samuel has also served as a director of Schroders and was co-chief executive officer at Schroder Salomon Smith Barney. He is also a Fellow of the Institute of Chartered Accountants in England and Wales.

Olivier Brousse became CEO of John Laing in March 2014. Prior to joining John Laing, he was at French environmental services company, Saur, first as CEO and then chairman. Mr Brousse also held senior roles in the transport sector for Veolia, including as deputy CEO of Veolia Transport Group, responsible for French and US businesses.

Group finance director: Patrick O’D Bourke

Patrick O’D Bourke joined John Laing in 2011 as group finance director. In addition to a background in accountancy and investment banking, he held senior financial positions with PowerGen as group treasurer and head of mergers and acquisitions. Mr O’ D Bourke became CEO of Northern Ireland based energy company Viridian after it was taken private.

Management team

Chairman: Will Samuel

Will Samuel joined John Laing in December 2017 and took over as chairman in May 2018 after AGM. Mr Samuel is also chairman of Tilney Group and previously was chairman of TSB Bank, Howdens Joinery Group, Ecclesiastical Insurance Group and H P Bulmer. Mr Samuel has also served as a director of Schroders and was co-chief executive officer at Schroder Salomon Smith Barney. He is also a Fellow of the Institute of Chartered Accountants in England and Wales.

Chief executive officer: Olivier Brousse

Olivier Brousse became CEO of John Laing in March 2014. Prior to joining John Laing, he was at French environmental services company, Saur, first as CEO and then chairman. Mr Brousse also held senior roles in the transport sector for Veolia, including as deputy CEO of Veolia Transport Group, responsible for French and US businesses.

Group finance director: Patrick O’D Bourke

Patrick O’D Bourke joined John Laing in 2011 as group finance director. In addition to a background in accountancy and investment banking, he held senior financial positions with PowerGen as group treasurer and head of mergers and acquisitions. Mr O’ D Bourke became CEO of Northern Ireland based energy company Viridian after it was taken private.

Principal shareholders

(%)

Standard Life

13.02

FIL Ltd

8.96

Blackrock

7.41

Baillie Gifford

4.44

BMC Financial Corp

4.21

Companies named in this report

3i Infrastructure Group, Bilfinger Berger GI, GCP Infrastructure Investments, HICL Investments, International Public Partnerships, John Laing Infrastructure Fund, Bluefield Solar Income, Foresight Solar, Greencoat UK wind, John Laing Environmental assets, NextEnergy Solar Fund, The Renewable Infrastructure Group

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by John Laing Group and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

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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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by John Laing Group and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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