Track record of growth

John Laing Group 31 August 2016 Initiation

John Laing Group

Track record of growth

Initiation of coverage

Investment companies

31 August 2016

Price

259.5p

Market cap

£952m

Net debt (£m) as at 30 June 2016

94.4

Shares in issue

366.9m

Free float

100%

Code

JLG

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

15.3

17.8

19.9

Rel (local)

13.3

9.2

10.7

52-week high/low

259.5p

187.0p

Business description

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

Next events

Trading statement

December 2016

Analysts

Graeme Moyse

+44 (0)20 3077 5700

Roger Johnston

+44 (0)20 3077 5722

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

John Laing (JLG), listed in February 2015, has a diversified portfolio of investments, by sector and geography, and with an even split of operational projects and assets under construction. We believe that JLG is well placed to capitalise on the future demand for infrastructure and renewable investment and we forecast a total return (NAV and DPS growth) of c 17% (2015-20). This growth should lead to a reduction in JLG’s valuation discount.

Year
end

NAV
(p)

EPS*
(p)

DPS**
(p)

P/NAV
(x)

P/E
(x)

Yield
(%)

12/15

242

27.6

6.9

1.1

9.4

2.7

12/16e

275

42.2

8.0

0.9

6.1

3.1

12/17e

305

37.4

9.0

0.9

6.9

3.5

12/18e

340

43.8

9.2

0.8

5.9

3.5

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

Diversified portfolio and strong underlying markets

Despite some short-term weakness in investment in certain sectors and geographies, the long-term outlook for investment in infrastructure and renewable energy projects appears favourable. Given JLG’s investment experience, its track record of success, its diversified portfolio (19% renewable energy, 57% transport) and its global business reach (55% of portfolio outside the UK as at 30/6/16), we believe it is well placed to capitalise on the favourable macro environment.

Track record underpins growth forecasts

In the period 2011-15, JLG achieved a CAGR of c 12% in the total portfolio value (incl. an £80m transfer to the pension fund) and CAGR in the NAV of c 22%. An increase in H116 of 8% in the NAV indicates the business is set to achieve further growth in the current year. We expect a CAGR in JLG’s NAV of c 12% and 4.9% in the DPS in the period 2015-20. These growth rates compare favourably with the average last five-year NAV total return (NAV including capital and dividends) for the AIC Infrastructure sector of c 12%. Even in the absence of new investment, incremental value accretion (“embedded growth”) from existing projects, as they approach completion and are de-risked, and value enhancements to primary and secondary projects would sustain medium-term growth. In both FY14 and FY15 “embedded growth” amounted to more than 10% of opening portfolio value.

Valuation: Significant discount to NAV

UK-listed infrastructure and renewable energy funds currently trade at a weighted average premium to NAV of c 19%. JLG stands at a conservative 4% discount. The discount may in part reflect market indigestion following the distribution of Henderson Equity Partners’ (62.6%) shareholding (October 2015), and in part a cautious attitude towards the valuation of primary portfolio assets by the market. Given the growth that we forecast in JLG’s NAV and DPS, in particular due to the attractive returns made in the primary investment portfolio, and the diminishing impact over time of the share distribution, we expect this valuation gap to close.

Investment summary

Company description: Infrastructure originator and investor

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 transport, environmental and social sectors. As at 30 June 2016 the value of the investment portfolio of 40 projects was £945.2m (incl. the holding in JLEN). The assets are split between projects under construction (21 projects, £486.6m) and operational projects (18 projects, £443.2m). JLG has separately listed two funds on the London Stock Exchange: John Laing Environmental Assets (JLEN – 2014) and John Laing Infrastructure Fund (JLIF – 2010). JLG retains c 6% of JLEN.

Valuation: Discount to NAV and peers

UK-listed infrastructure and renewable energy funds trade at an average premium to NAV of c 19%, compared to JLG’s current 4% discount. Applied to JLG’s last reported NAV of 263p, a 19% premium would indicate a potential valuation of 313p. We believe the market valuation of JLG appears very cautious in light of the track record of growth, the embedded growth in the business due to annual unwinding of project discount rates and reductions related to diminishing construction risk (>10% of opening portfolio value in the last two years). Over time we would expect JLG’s valuation discount to close as it continues to demonstrate growth in its NAV and DPS. We have calculated that the current market valuation implies value of only £383m for the primary portfolio. This appears conservative in light of the last declared primary portfolio valuation of £487m.

Financials: NAV and DPS growth forecast

JLG considers NAV and DPS growth to be the key barometers of success. We project that investments will equal realisations in future, although in the short term JLG has been investing more heavily with the proceeds of the IPO. We project that JLG will achieve a 12% CAGR in NAV in 2015-20. We forecast 3% growth in the ordinary DPS and assume a special dividend equivalent to c 7% of the value of annual investment realisations (JLG has a policy of paying special dividends equivalent to approximately 5-10% of gross proceeds from the sale of investments).

Exhibit 1: Movements in portfolio value and NAV per share

Total portfolio value, £m

2014

2015

2016e

2017e

2018e

2019e

2020e

Opening value

684.4

772.0

841.4

1,021.1

1,148.7

1,292.3

1,453.9

Cash invested

151.8

142.5

150.0

160.0

160.0

160.0

160.0

Cash yield

(24.3)

(38.9)

(42.3)

(47.6)

(53.5)

(60.2)

(67.2)

Investment realisations

(198.5)

(86.3)

(120.0)

(160.0)

(160.0)

(160.0)

(160.0)

Assets transfers

0.0

(80.0)

0.0

0.0

0.0

0.0

0.0

Rebased asset value

613.4

709.3

829.1

973.5

1,095.2

1,232.1

1,386.7

Total fair value movement

158.6

51.8

191.9

175.2

197.1

221.8

235.7

Closing value

772.0

841.4

1,021.1

1,148.7

1,292.3

1,453.9

1,622.5

NAV (p/share)

N/A

242

275

305

340

381

425

Source: Edison Investment Research

Sensitivities: Discount rates and foreign exchange

JLG has stated that a 1% increase in the discount rate applied to its DCF valuation of projects would reduce the value of the investment portfolio by c £113.4m. A 1% reduction in the discount rate would increase the value of the portfolio by c £135.5m. Under- or outperformance of a project against forecast, whether as a result of initial misforecasting or changes to the regulatory or macroeconomic environment, would also reduce or increase the portfolio value.

Before hedging, a c 10% depreciation in the value of sterling against the basket of currencies would result in a c 5% increase (c 12p/share) in the value of the portfolio in sterling terms.

Sustained and secure growth

The H116 results confirmed the continuing growth trajectory of JLG and the long-term outlook for investment in infrastructure and renewable energy markets appears encouraging. Given JLG’s experience of investment in the underlying markets, its track record of success, its diversified portfolio of assets and its global business reach, we believe the company is well positioned to capitalise on the favourable macro environment. We also believe that, even in the event of less favourable market outcomes than predicted currently, the structure of “embedded growth” within the business would allow medium-term progression in the NAV.

Track record of value creation

JLG made its first infrastructure investment in 1969 and the company has committed to invest in 120 projects since. The first public-private partnership (PPP) investment was made in 1990 and the first renewable investment was made in 2011. Despite the volume of investment (over 100 projects) JLG has been forced to write down to zero only one investment, a German toll road project (2012, £34m).

JLG’s strategy is to create value for shareholders by utilising its investment origination and its asset management skills on an international basis. The company measures its success by reference to growth in DPS and NAV. To implement its strategy JLG has targeted delivery of three core objectives: growth in primary investment, growth in external assets under management (AUM) and ongoing management of the investment portfolio.

JLG can point to a record of successful growth in recent years in the key benchmarks of the investment pipeline, portfolio, external assets under management and, most importantly, the NAV (Exhibit 2). According to figures provided in its listing prospectus, in the period between 2007 and September 2014, John Laing realised 19 PPP investments at an average money multiple of c 2x and at an average annualised rate of return (ARR) of 23%. In the same period JLG sold two renewable energy investments at an average money multiple of 1.4x and with an ARR of 25%.

Exhibit 2: Track record of growth in major benchmarks

2011

2012

2013

2014

2015

2011-15
CAGR (%)*

Pipeline (PPP only) (£m)

835.0

925.0

986.0

1,067.0

1,135.0

8.0

Total portfolio value (£m)

541.3

575.9

684.8

772.4

841.8

11.7

NAV (£m)

408.0

437.0

528.0

649.8

889.6

21.5

External AUM (£m)

380.0

537.0

796.0

1019.9

1135.6

31.5

Source: John Laing, Edison Investment Research. Note: *JLG raised £130m (gross) at the time of its IPO in Q115.

Portfolio analysis

As at 30 June 2016, JLG’s portfolio included 40 investments with a total value of £945m, including £15m relating to its holding in John Laing Environmental Assets (JLEN). Around 19% of the portfolio value relates to renewable energy investments, with 2% accounted for by the value of its holding in JLEN and the rest related to PPP investments. The vast majority of the portfolio (74%) generates its revenue from availability linked mechanisms with the income of the renewable projects related to volume. Of the total portfolio, 78% has a remaining concession life in excess of 20 years. In addition it is worth noting that JLG’s top five projects accounted for 46% of the total portfolio value at 30 June 2016, compared to 43% at 31 December 2015. While the UK still comprises c 45% of the portfolio by value, its share has been declining recently, and this trend is expected to continue given the geographical distribution of the investment pipeline (<10% relates to the UK).JLG’s recent acquisition of a 30% stake in the Nordergrϋnde offshore wind farm (German North Sea) illustrates how the mix of the portfolio is constantly evolving as JLG invests in adjacent technologies or markets. With experience of both onshore windfarms and investment in Germany, JLG believes the Nordergrϋnde project represents an attractive opportunity for value creation.

Exhibit 3: Portfolio by geography

Exhibit 4: Portfolio by sector

Source: John Laing

Source: John Laing

Exhibit 3: Portfolio by geography

Source: John Laing

Exhibit 4: Portfolio by sector

Source: John Laing

Market positioning and competitive strengths

JLG’s strong investment track record enhances its competitive position when bidding for contracts. Its accumulated experience of infrastructure investment and its wide network of contacts in the infrastructure investment business work to JLG’s advantage when negotiating with potential partners. With a focus on greenfield infrastructure projects, JLG’s business profile is an important differentiating factor between JLG and other listed funds, which are generally more focused on operational assets. However, with an integrated business model (primary and secondary) JLG is able to capture value throughout the investment process and this represents an opportunity that is not available to all funds. The geographical reach and spread of investments also put JLG at an advantage to a significant number of other narrowly focused infrastructure/assets funds.

JLG invests its balance sheet capital in projects, unlike fund-based investors. The ability of JLG to access capital has been enhanced by its stock market listing. Having “skin in the game” provides reassurance to other project partners, particularly banks, and facilitates entry into a consortium. Construction companies may invest primarily to gain construction contracts, but JLG is only focused on the equity opportunity.

JLG’s relationship with JLEN and JLIF (separately listed in 2014 and 2010 respectively) represents a competitive advantage. As noted the secondary market for infrastructure and renewable assets remains strong, but in addition to the wider market JLG has potential purchasers in the shape of JLEN and JLIF. The two funds are not obliged to purchase JLG’s assets but they retain the right of first offer to buy certain assets. Approximately 75% of all assets sold by JLG have been purchased by either JLEN or JLIF.

While the market for infrastructure assets remains buoyant (see Appendix), JLG has not witnessed a large number of new entrants (high barriers to entry) into the market for primary investment. There has been some downward pressure on primary investment IRRs as a result of more aggressive behaviour on the part of existing players, although this has been offset, in large part, by a compensatory movement in secondary market returns, allowing JLG to maintain the all-important “yield shift”. The buoyancy of the secondary market for infrastructure assets is expected to continue and constitutes a clear competitive advantage for JLG in comparison to those funds that focus only on secondary market investment.

The majority of John Laing’s direct competitors are either part of larger investment groups or are unquoted. For example, Aberdeen Asset Management runs a number of infrastructure funds within its fund management business. Other competitors would include Equitix, Meridiam, Capella and STAR, with the latter two funds targeting Australia and Western Europe, respectively. Perhaps InfraRed Capital Partners, despite its status as a fund, with offices in London, Hong Kong, New York, Paris and Sydney, constitutes the most closely comparable company to John Laing. InfraRed has c 120 staff spread across its offices and, like John Laing, has launched a number of funds that are now listed on the LSE (HICL Infrastructure and The Renewables Infrastructure Group).

Experienced board and management

The board of John Laing possesses significant experience of the energy, environmental, transport and utility sectors. Phil Nolan is chairman of the board, which includes two executives, Olivier Brousse and Patrick O’D Bourke, and four other non-executives. Phil Nolan is also chairman of Affinity Water and was formerly CEO and chairman of gas network company Lattice. CEO Olivier Brousse was previously CEO of French environmental services company Saur and also worked in a number of senior roles in the transport sector for Veolia. Patrick O’D Bourke, in addition to a background in accountancy and investment banking, held senior financial positions with PowerGen and was CEO of Northern Ireland based energy company Viridian. In addition to the executive directors, John Laing has a senior management team of three: Carolyn Cattermole (general counsel and company secretary), Derek Potts (MD of primary investment) and Chris Waples (MD of asset management). Derek Potts has been with JLG since 2001, and formerly held senior positions at Jardine Matheson UK, GB Railways and Virgin Group. Chris Waples joined JLG in 2007 and previously held senior positions at Scottish Power and Blue Circle.

The investment process – origination and management

JLG’s business is divided into a primary and secondary investment business. The primary investment business (origination and bidding) creates value by developing greenfield infrastructure projects (targeting hold to maturity IRRs estimated to be 10-12%) in JLG’s core markets of North America, Europe and Asia-Pacific. The investment is focused on three broad sectors: transport (roads/rail), environmental (renewable energy/water/waste) and social infrastructure (schools, healthcare, housing, plus other government buildings, eg prisons). Within each of these sectors, JLG seeks to extend its expertise into new asset classes in order to embrace alternative risk profiles. The projects, which are developed jointly with partners and are held in SPVs with no recourse to JLG from private finance debt providers, are typically backed by the national government or government bodies in the case of infrastructure assets and by subsidy regimes in the case of renewable energy.

The origination process requires the identification of attractive investment opportunities and the assembly of a consortium to bid for the project. In evaluating a potential investment John Laing targets countries that show a commitment to privately financed infrastructure projects and that enjoy a stable political and regulatory framework. The project should also offer the opportunity to form supply chain partnerships and meet its financial return objectives.

The second stage of the process, the bidding and investing, typically takes between 18 and 24 months for a PPP project. For renewable energy projects the timescale is shorter, with a period of six to 12 months from identification of an investment opportunity to financial close. Once financial close has been reached, PPP projects typically take four years before they begin commercial operation (renewable projects about one year). Throughout the construction phase JLG revalues its investment in projects to reflect the diminishing risk of the project as it nears completion. The discount rates are based on operational assets and are specifically related to country of operation and asset type.

Once a project commences operation JLG’s investment in it is transferred to the secondary investment portfolio. The secondary investment portfolio is managed by JLG’s asset management division. As mentioned above, the investments are valued using an operational discount rate, reflecting the reduced risk of the project. Once investments have been transferred to the secondary portfolio they can either be sold to secondary market investors or held to maturity. Should JLG choose to sell an investment, JLEN and JLIF retain first rights of purchase over certain assets. In 2015 JLG completed realisations worth £86.3m (H116 £57.7m), selling seven projects, five of which were sold to JLEN or JLIF.

JLG’s long and successful track record of investment in PPP projects and its technical expertise have enabled it to build an extensive network of relationships with investing partners, construction companies and financial institutions (eg Vinci, ACS, Hochtief) and this constitutes a clear competitive advantage in the formation of consortia. In our view, any new entrant would find it hard to replicate this network of contacts. An example of the investment process for Forth Valley Royal Hospital is shown in Exhibit 5 below.

Exhibit 5: Originating, investing in and managing Forth Valley Royal Hospital

Source: John Laing

The primary investment business

The primary portfolio contains investments in projects that have yet to reach “financial close” or that have reached financial close but are not yet operational. As at 30 June 2016 JLG’s primary investment portfolio contained 21 projects (14 PPP and 7 renewable energy), valued at £486.8m (average ticket size c £23m). Each investment is valued by JLG using a DCF template, with varying discount rates applied depending on project type, location and state of completion. Once the underlying projects become operational, the investments are transferred to the secondary portfolio.

Exhibit 6: PPP Pipeline by geography (£m)

Exhibit 7: Pipeline by stage (£m)

Source: John Laing

Source: John Laing

Exhibit 6: PPP Pipeline by geography (£m)

Source: John Laing

Exhibit 7: Pipeline by stage (£m)

Source: John Laing

Offsetting transfers to the secondary portfolio, the primary portfolio benefits from annual new investment (average £121m pa 2011-15). In addition to new investment (actual investment in a given year), which directly affects the value of the primary investment portfolio, JLG also publishes an annual investment commitment figure (a signed commitment to make an investment in the future). In 2015 investment commitments totalled £180.5m (£135m average 2011-14 – H116 £76m), split between renewable energy (£112.5m) and PPP (£68m). Both new investment and investment commitments are the product of the investment pipeline, which has achieved strong growth in recent years (CAGR 8% in the period 2011-15). As at 30 June 2016 the pipeline stood at £1,778m (77 projects). The pipeline consists of opportunities to invest that are expected to reach financial close over the next three years in the case of PPP projects (£1,337m) and two years for renewable energy projects (£441m). JLG uses a working assumption of a “win rate” of c 30% (actual rate 39% 1 January 2009 to 30 April 2014). Based on a three-year pipeline and a win rate of 30%, a broad-brush estimate would indicate annual investment commitments of c £150m (£1.5bn/3 x 30%). However, this figure does not include annual additions to the pipeline and the fact that the win rate for renewable energy projects is higher than 30%, suggesting that the actual figure for commitments would be higher than £150m. Management believe that its business is not facing capacity constraints currently and that it retains the ability to increase the number of projects and the average ticket size should the opportunities arise.

Portfolio value evolution

JLG invests based on an expectation of achieving a hold to maturity IRR estimated to be between 10% and 12%. The target IRR is set with a view to generating an attractive annualised return when JLG sells the operational asset in the secondary market (c 7-8%). The secondary market IRR reflects the secondary discount rate employed by listed PPP infrastructure funds (Exhibit 8), but is also based on JLG’s analysis, along with that of its advisors, of transactions. The difference between an hold-to-maturity IRR and a secondary market IRR is what JLG calls a “yield shift”.

Exhibit 8: Secondary discount rate benchmarking

Source: John Laing

As we have noted, JLG projects valuations for new projects (both renewable energy and PPP) by using a standardised DCF template. These internal valuations are crossed checked by external bodies (auditors/consultants). Clearly each construction period will be different (lengths vary from three to seven years) and therefore, although interesting in showing the potential value progression of a project, the example shown below is only indicative. However, according to figures taken from the 2015 listing prospectus, for a typical PPP project the template assumes capital subscription occurring four years after financial close. At financial close (year 0), this template recognises 20% of the project’s total expected investment commitment, in year one 10%, in year two 15%, in year three 25% and in year four 40%. At the end of year four, the project is worth c 110% of the projected investment value before cash subscription, which, once completed, raises the valuation to 210% (2.1x investment).

The progressive reduction of a project risk profile between the time of the initial investment and commercial operation is thus captured in what JLG calls the “portfolio book value evolution”. The example below implies an ARR of c 27% over the period from financial close to commercial operation. For renewable energy projects, the template assumes that capital injection occurs on financial close and the construction period is shorter at c 12-18 months rather than four years. Market transactions show that by the time the renewable energy asset becomes operational it is worth 130% (1.3x) of the initial capital injection. While the valuation multiple for renewable energy projects is lower than for PPP projects, the achieved ARR is similar to that for PPP projects because of the shorter construction period.

Exhibit 9: JLG forecasting template for portfolio book evolution of a primary PPP project

Source: John Laing IPO Prospectus

Embedded growth

While the absence of new business opportunities would reduce JLG’s long-term growth profile, in the near term the structure of the business provides it with a buffer of “embedded value” (derived from twice yearly updating of a project’s DCF) and ensures that there is significant stored growth. The “embedded growth” (which forms part of the annual fair value adjustment through the P&L) is achieved before further “value enhancements” (also included in fair value movements) to projects, which we consider separately. Assuming, on average, that the primary investment portfolio (£487m) is halfway through the four-year progression, the incremental value creation is c. 65%, equivalent to c £317m or 86p/share. As new investment and commitments are made, this number will increase.

This annual adjustment is reflected in the P&L as part of the fair value adjustment via the unwinding of the discount rate and the reduction of construction risk and constitutes a significant proportion of the total annual fair value adjustment that flows through the P&L. In FY15 growth due to discount rate unwinding amounted to £61m out of a total fair value adjustment of £132m, equivalent to 46% of the total fair value adjustment and 8% of the opening portfolio value. Adding uplift due to a reduction in construction risk premiums (£22.8m in FY15, £17.4m H116) takes total “embedded” adjustments in value to c 63% of total movement in fair value and is equivalent to uplift in the opening portfolio value of more than 10% (c £84m). Importantly these gains are likely to be recurring. Secondary market transactions, which show that JLG has been able to realise proceeds slightly above the book value, on average, in transactions since the IPO, confirm the validity of this valuation process. The evolution of the portfolio book emphasises that the intrinsic value of the company is more than portfolio plus investment commitments.

Project enhancements

John Laing seeks to create additional value through the enhancement of existing projects. These value enhancements can be generated in a number of different ways and can include: reduction in insurance costs by spreading them over a number of different investments; more effective management of working capital within projects (specifically more advantageous deployment of cash balances); and securing the recognition of the residual value of assets that do not revert to the owner at the termination of the project but still have a useful operating life. In FY15 value enhancements made to projects totalled £38m, (H116 £13.6m) equivalent to c 29% of the total fair value movement. Although the personnel responsible for project enhancement sit within the asset management business, value enhancements are made both to the primary and secondary portfolio.

Secondary investment portfolio

Once a project commences operation, JLG’s investment in it is transferred to the secondary investment portfolio. The secondary investment portfolio is managed by the asset management business. At the secondary stage the investments are valued using a market-based discount rate for operational assets (lower), reflecting the reduced risk of the project. Over time, the weighted average discount rate used by JLG has trended downward, although it remains above many of its listed peers (Error! Reference source not found.). Investments in the secondary portfolio can either be sold or held to maturity.

Exhibit 10: Primary and secondary portfolio valuation and discount rates

Value
(£m)

Number of
projects

31/12/15
(%)

30/6/16
(%)

Primary (projects under construction)

486.8

21

9.7

9.3

Secondary (projects in operation)

443.2

18

8.9

8.5

Holding in JLEN

15.2

 N/A

N/A

 

945.2

 9.5

9.1

Source: John Laing. Note: At 30 June 2016.

Should JLG choose to sell an investment, JLEN and JLIF retain right of first offer in respect of certain assets. In 2015 JLG completed realisations worth £86.3m (H116 £57.7m), selling seven projects, five of which were sold to JLEN or JLIF. On average, in the period 2011-15, disposals totalled c 21% of portfolio value. In addition to income generated from the disposal of investments, income is received from the yield on secondary investments, known as the “cash yield”. This income takes the form of dividend income and repayment of subordinated debt. Management has guided that in a normal year the cash yield on the portfolio should amount to between 6.5% and 8.5% of the average secondary portfolio.

Exhibit 11: Evolution of cash yield and disposals

 

2011

2012

2013

2014

2015

H116

Cash yield (£m)

36.2

38.0

32.0

24.3

38.9

18.3

Investment realisations (£m)

124.9

135.0

110.1

198.5

86.3

57.7

Source: John Laing

External asset management

John Laing Capital Management (JLCM) provides investment management services to external funds: John Laing Infrastructure Fund (JLIF), John Laing Environmental Assets (JLEN) and a small number of PPP assets held by John Laing Pension Fund (JLPF). Separate advisory agreements exist between JLCM and JLIF and JLEN (originally established for five years from 27 October 2010 for JLIF and from 31 March 2014 for JLEN), and these agreements continue unless terminated by JLCM or the funds upon 12 months’ notice. Under the terms of the JLEN agreement, notice cannot be given until March 2018.

As an advisor, provider of management services and an originator of new investments on behalf of JLEN and JLIF (which retain first rights of purchase on certain investments if JLG chooses to sell), JLCM maintains an important influence on the performance of these funds. In turn the performance of the funds has a direct effect on the value of the external assets under management and hence JLCM’s management fee (which is directly linked to the value of assets under management [AUM]). In 2015 John Laing (via JLCM) received a fee of £12m for the provision of its services to JLEN and JLIF, equivalent to c 1% of external AUM. In H116 external AUM rose to £1,277.5m.

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

External assets

 

2011

2012

2013

2014

2015

Average external AUM

£m

N/A

458.5

666.5

908.0

1,077.8

External AUM fees

£m

3.8

5.7

8.2

10.3

12.0

Fees/average external AUM

%

N/A

1.2

1.2

1.1

1.1

Source: John Laing, Edison Investment Research

The asset management operation has historically included two distinct profit centres: investment management services (IMS), which includes JLCM, and project management services (PMS). However, on 21 June 2016 JLG announced the disposal of the UK activities of the PMS business for an undisclosed sum (expected closure Q4). The PMS business provided services, under management service agreements (MSAs), to projects in which JLG, JLIF or JLEN held investments. As at 31/12/15 there were 75 MSAs in place and JLG generated £17m in revenue from PMS in 2015. In H116 the activities to be sold generated c £4.7m of revenue and incurred costs of c £4m.

H116 results

H116 results showed a continuation of the strong growth trajectory. Investment commitments increased by 5% to £76m and the key measure of performance, the NAV, rose by 8.3%, from 242p/share, to 263p/share. The principal driver of NAV growth was the £128.2m increase (35p/share) in the fair value (FV) movement of the portfolio, offset by the payment of last year’s DPS (£19.4m - 5p/share) and other P&L items (£34.7m – 9p/share) including an increase in pension liabilities due to the use of a lower rate with which to discount the liabilities. FX movements of £49.4m and changes to operational benchmark discount rates of £27.5m contributed significantly to the FV movement. However “embedded growth” from the unwinding of discount rates (£36.6m) and a reduction of construction risk premia (£17.4m) accounted for over 40% of the FV movement.

Risks

The risks facing JLG can be considered to fall into three generic areas:

Group risks: The principal benchmark of success for JLG is the progression of the NAV, which is dependent to a large extent on the value of the underlying projects, which are valued using a DCF methodology. A rise in global interest rates could lead to a change in the discount rate used in the DCF, reducing the value of the projects and hence the NAV. Similarly a misforecasting of the potential future cash flows of a project would pose a risk to valuation. Conversely, reductions in discount rates would increase the value of the investment portfolio and all other things being equal, result in an increase in the size of the pension liabilities, in effect a partial natural hedge. Other risks include the possibility that the realisable value of assets is less than the DCF valuation, a decline in the win rate for new projects, unfavourable tax changes related to infrastructure investment, and a reduction in the global appetite for infrastructure investment in both primary and secondary markets.

Project risks: Changes to regulation governing the operation of the underlying assets could pose a threat to project profitability and cash flow. Changes to subsidy regimes and reduced market power for prices could also undermine project profitability. A tightening in credit markets could prevent, in certain circumstances, projects from refinancing portions of their debt.

Risk to assets under management: Reduction in the value of AUM, would be detrimental to the profitability of JLG. Lower value of assets would reduce income from management fees to JLG and a decline in stock markets could limit the ability of JLIF and JLEN to raise fresh capital, which, in turn, could reduce their capacity to acquire assets from JLG.

Modelling and valuation sensitivities

Discount rate: John Laing has calculated that a 1% increase in the discount rate applied to its DCF valuation of projects would reduce the value of the investment portfolio by c £113.4m. A 1% reduction in the discount rate would increase the value of the portfolio by c £135.5m.

Foreign exchange: With c. 50% of JLG’s portfolio invested outside the UK, the value is sensitive to movements of the pound versus the US dollar, New Zealand dollar, Australian dollar and the euro. Before the impact of hedging, a c 10% depreciation in the value of sterling against the relevant of currencies would result in a c £50m increase in the value of the portfolio.

Pension liabilities: A reduction in the rate used to discount future pension liabilities, as seen in H1 results, increases the overall pension liability. JLG has stated that a 0.25% reduction in the rate applied results in a £39m increase in the size of the liability. This figure ignores any offset related to movements in the underlying pension fund assets and hedges put in place.

Valuation

Although no UK-quoted company exactly replicates JLG’s business mix, we have examined a cross section of UK-listed infrastructure and renewable energy funds to provide an NAV valuation benchmark. The result of our analysis shows a market cap weighted average premium to NAV of c 19%, compared to JLG’s 4% discount (based on 253p share price). Applied to JLG’s last reported NAV of 263p, a 19% premium would indicate a valuation of 312p. Market indigestion following the distribution of the Henderson Equity Partners’ 63% holding in October 2015 may still be accounting for some of this discount. Over time we would expect JLG’s valuation discount to close as the market has greater time to digest the equity distribution.

JLG’s discount may in part also relate to the greater relative scale of its primary investment business (c 50% of portfolio) compared to those of many of its listed peers (eg JLIF, JLEN, HICL). We believe this greater exposure to project development and higher perceived risk may lead the market to place a larger discount on the shares despite the prospect of strong NAV growth (Edison forecast 2015-20 CAGR 12%) backed by a demonstrable track record of success. In an attempt to quantify this we have derived a valuation for the primary investment portfolio, using, as a starting point, JLG’s market valuation. Based on a share price of 250p, we calculate JLG has an EV of c £1,071m after adding the net debt shown on the balance sheet of £94.4m and £43.6m of pension liabilities (both as at 30 June 2016) to the current market capitalisation (£933m). Subtracting the value of JLG’s holding in JLEN of c £15m and cash collateral held in other investments of £145.2m yields a theoretical total portfolio value of £910m. Applying the peer group weighted average premium of 19% to the declared value of the secondary investments (£443m) values the secondary portfolio at £527m, implying a value of only £383m for the primary investment portfolio. This appears a conservative figure in light of the last declared primary portfolio valuation of £487m, the diversified nature of the portfolio and JLG’s track record at selling investments at above book value. The valuation is equivalent to a discount of 21% on the primary portfolio alone and simply valuing the primary portfolio at book would add 28p to JLG’s share price.

Exhibit 13: JLG share price and NAV evolution

Source: Edison Investment Research, John Laing, Bloomberg

The DPS (annualised) for FY15 of 7.53p places JLG on a yield of 3.0%, based on a share price of 253p (actual yield 2.8% for period since listing), below peer group averages. The DPS remains well covered by EPS (4x in FY15), but, in part due to the early stage nature of much of its portfolio (hence a lower cash yield), the DPS, unlike some of its peers, was uncovered by cash. This is likely to remain the case in the short term, assuming investment realisations are equal in scale to new investment. However, based on JLG’s ambition of “real” dividend growth in the ordinary DPS and a “special” payment of c 5-10% of annual investment realisations, we expect CAGR in the DPS of 4.9% 2015-20 (from theoretical FY15 DPS) and over time, as the scale of the cash yield expands with the secondary portfolio, we expect JLG to move towards cash coverage of the dividend. Given the historic yield of 2.8% and our forecast NAV growth of c 12%, JLG offers an NAV total return, of c 15%(capital and dividends), compared to a c 12% sector average for infrastructure funds over the last five years according to Association of Investment Company statistics.

Exhibit 14: Comparable company valuations

Company

Price
(p)

Shares
(m)

Market cap
(£m)

Yield
(%) 

NAV
(p/share)

NAV
(date)

Prem/disc
to NAV (%)

3I Infrastructure Group

3IN

187

1,000.0

1,870.0

3.9

158.3

31/03/16

17

Bilfinger Berger Global Infrastructure

BBGI

146

432.1

628.7

4.1

105.6

31/12/13

39

GCP Infrastructure Investments

GCP

128

660.0

844.3

5.9

107.7

30/06/16

19

HICL Infrastructures

HICL

175

1,400.0

2,430.0

4.3

139.1

30/09/15

26

International Public Partnerships

INPP

157

1,100.0

1690.0

4.1

130.2

31/12/15

21

John Laing Infrastructure

JLIF

134

898.3

1,210.0

5.1

108.4

31/12/15

24

Weighted average, infrastructure

 

 

 

 

4.4

 

 

23

 

 

 

 

 

 

 

 

 

Bluefield Solar Income

BSIF

101

309.6

313.5

7.2

100.13

31/03/16

0

Foresight Solar

FSFL

102

281.8

286.4

6.0

98.3

30/03/16

3

Greencoat UK Wind

UKW

115

602.8

693.2

5.5

104.5

31/12/15

10

John Laing Env. Assets

JLEN

103

266.4

274.4

5.9

97.1

30/06/16

6

NextEnergy Solar Fund

NESF

104

332.8

344.5

7.6

101.9

30/06/16

3

The Renewables Infrast. Grp

TRIG

104

766.4

795.5

6.0

97.0

31/12/15

5

Weighted average, renewables

 

 

 

 

6.2

 

 

6

Total weighted average

19

John Laing Group

JLG

253

366.9

928.7

2.7

263

30/06/16

-4

Source: Bloomberg, company accounts, Edison Investment Research. Note: Prices as at 31 August 2016.

Financials

Portfolio movements: We assume new investments of c £150m in FY16 and £160m in FY17 (average 2011-15 £121m). In FY16 we forecast investment realisations of c £120m, in line with company guidance of c £100m plus an additional £19.5m relating to the deferral of a realisation from 2015. For FY17 we expect realisations of c £160m (average 2011-15 £131m). We forecast the cash yield using a rate of 8% (average 2014-15: 7.9%). We forecast fair value movements of £192m for FY16 (including £49m FX) and £175m for FY17 (see Exhibit 1).

Disposal: We expect that the disposal of PMS will complete at the end of Q316 resulting in an exceptional profit of £4.5m..

Administration costs: Following an adjustment to the cost base in FY16 and FY17 to reflect the disposal of PMS, we assume only inflationary increases in the administrative cost base.

Tax: We assume JLG is not required to pay any tax in the forecast period.

Debt: We assume a rise in net indebtedness over the period to £87m by 2020.

Pension contributions: We assume JLG makes a contribution to the JLPF of £18m in FY16 and £19m in FY17. Beyond FY17 we assume annual contributions of £25m.

DPS: JLG announced a total base dividend of £17.7m for the financial year ended 31 December 2015, reflecting the intention set out in the listing prospectus (February 2015) of paying £20m for 2015 reduced pro rata for the period from the date of admission. On a DPS basis, this equates to a payment of 4.8p (split 1.6p + 3.2p, ie + ). JLG has a policy of increasing the ordinary DPS “at least in line with inflation.” In addition to its base payment, JLG intends to pay special dividends equivalent to approximately 5-10% of gross proceeds from the sale of investments. In 2015 the special dividend amounted to £7.7m (2.1p/share). For modelling purposes we forecast 3% growth in the ordinary DPS split on the existing basis and assume a special dividend equivalent to c 7% of the value of annual investment realisations.


Appendix

Background to PPP and renewable energy projects

Public-private partnership contracts (also known as PPP or P3) are designed to deliver large-scale infrastructure projects, via a collaboration between public entities and private companies. A private sector consortium will usually form a “special purpose vehicle” (SPV) to develop, build, maintain and operate the asset. The SPV in turn may sub-contract construction and operation to construction companies and service providers, effectively transferring some of the project risk. Debt required to finance the infrastructure spend will be raised by the SPV.

The precise structure of these contracts varies across jurisdictions, but common features include:

Long-term contracts (20-30 years),

The SPV is usually highly geared (80-90%),

Asset ownership reverts to the public body at the end of the contract,

Certain risks (eg construction) are borne by the private sector,

A link between remuneration and performance, and

Availability determined revenues.

Renewable energy projects (mainly wind and solar) tend to have shorter construction periods (one to two years) than PPP projects (four to six years) and they tend to be less highly geared (60-80% versus 80-90% for PPPs). Although renewable energy projects benefit from subsidy regimes/incentives, part of their revenue is derived from long-term sales contracts, which can be influenced by market prices for power. Whereas PPP projects have a significant element of availability related revenue, for renewable power projects revenue is influenced by output.

Global infrastructure and the market for PPPs

Population growth and increased urbanisation are key drivers of infrastructure investment. The favourable outlook for the mega trends of population growth and urbanisation has given rise to predictions of continued growth in infrastructure investment. The McKinsey Global Institute estimates, in its report, “Bridging Global Infrastructure Gaps” (June 2016), that today the world invests c $2.5trn pa on transport, power, water and telecoms, but will need to invest $3.3trn pa in the period 2016-30 to meet expanding global needs.

Exhibit 15: Projected global population (m) growth and urbanisation (%)

Source: United Nations “World Population Prospects – 2015 Revision”, “World Urbanisation Prospects – 2014 Revision”. Information downloaded 5 August 2016.

Specifically, the OECD has concluded that “infrastructure investment needs to be substantially increased in most developing and emerging economies to meet social needs and support more rapid economic growth.” As a consequence, Asia and Africa are predicted to take the largest share of infrastructure investment.

Given the scale of the required investment, private sector participation will be critical in reducing the pressure on public finances. With the ability to transfer the debt required to fund much of the infrastructure investment to SPVs, PPP projects appear poised to play a significant role in this investment programme. The PPP model was first developed in the UK in the late 1980s/early 1990s (as PFI, private finance initiative) and although it is now less popular as a means of financing infrastructure projects in the UK following criticisms of not delivering value for money for governments, PPPs are now used in half the world’s countries.

Renewable energy market

Investment in renewable energy has grown rapidly. The growth has been driven by international commitments to reduce greenhouse gas emissions and a desire by national governments to reduce energy imports and enhance domestic security of supply. Figures produced for investment in the renewable energy sector (Frankfurt School FS-UNEP Collaborating Centre for Climate & Sustainable Energy Finance) show that global investment reached $285.9bn in 2015, up 5% on the previous year and above the previous record of $278.5bn achieved in 2011. Investment has totalled more than $200bn in every year since 2009 and the 2015 figure represented a total of six times the investment made in 2004 (equivalent to a CAGR of 18% over the period 2004-15). Wind and solar generation account for the c 95% of the investment in terms of technology. China has now overtaken the US and Europe to become the single largest investor in renewable technology.

Exhibit 16: Renewable investment, $bn, 2004-15 by geography and technology

Source: United Nations “World Urbanization Prospects: The 2014 Revision”, “World Population Prospects, the 2015 Revision” (downloaded 4 August 2016)

Reduced commodity prices, less favourable economic conditions and moves by some governments to make incentive regimes less generous (eg UK) may lead to some short-term reduction in renewable investment, but the long-term growth of renewable energy is expected to continue. This expectation of growth is based upon a continuing need to bear down on emissions, particularly in light of commitments given at COP-21 in Paris at the end of 2015, and the falling cost of renewable technology. The US government forecasting body the EIA, in its “International Energy Outlook 2016”, expects investment in wind to grow by 5.7% annually and solar by 8.3% annually over the period 2012-40. BP, in its “2016 Energy Outlook”, predicts that renewables will grow at 6.6% pa over the period of their study (2015-35), supported by the falling costs of both wind and solar.

The market for secondary investment is also expected to remain strong for renewable energy and the Frankfurt School FS-UNEP Collaborating Centre for Climate & Sustainable Energy Finance has identified that “the fastest evolving aspect of equity provision for renewable energy projects is at the post construction stage, when new and more risk-averse institutional investors (North American yieldcos or London-based project funds) have been looking to get involved in order to access predictable cash flows of an operational stage project.”

Exhibit 17: Financial summary

£m

2014

2015

2016e

2017e

2018e

2019e

2020e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

206.6

167.6

223.6

200.7

223.2

248.2

262.6

Cost of Sales

(0.4)

(0.1)

(0.5)

(0.5)

(0.5)

(0.5)

(0.5)

Gross Profit

206.2

167.5

223.1

200.2

222.7

247.7

262.1

EBITDA

147.1

113.4

171.6

151.9

173.5

197.4

210.8

Operating Profit (before SBP, amort. and except.)

146.1

112.7

170.8

151.1

172.7

196.6

210.0

Intangible Amortisation

(0.5)

(0.5)

(0.3)

0.0

0.0

0.0

0.0

Share based payments

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

4.5

0.0

0.0

0.0

0.0

Other

5.7

0.0

0.0

0.0

0.0

0.0

0.0

Operating Profit

151.3

112.2

175.0

151.1

172.7

196.6

210.0

Net Interest

(25.7)

(11.3)

(14.1)

(13.0)

(11.1)

(12.0)

(13.4)

Profit Before Tax (norm)

120.4

101.4

156.8

138.1

161.5

184.6

196.6

Profit Before Tax (FRS 3)

125.6

100.9

161.0

138.1

161.5

184.6

196.6

Tax

0.2

(2.1)

(1.5)

0.0

0.0

0.0

0.0

Profit After Tax (norm)

120.6

99.3

155.3

138.1

161.5

184.6

196.6

Profit After Tax (FRS 3)

125.8

98.8

159.5

138.1

161.5

184.6

196.6

Average Number of Shares Outstanding (m)

300.0

358.3

366.9

366.9

366.9

366.9

366.9

EPS - normalised (p)

40.2

27.7

42.3

37.6

44.0

50.3

53.6

EPS - normalised and fully diluted (p)

40.2

27.6

42.2

37.4

43.8

50.1

53.3

EPS - (IFRS) (p)

41.9

27.6

43.5

37.6

44.0

50.3

53.6

Dividend per share (p)

0.0

6.9

8.0

9.0

9.2

9.4

9.6

Dividend Cover (normalised and fully diluted) (x)

N/A

4.00

5.24

4.14

4.76

5.33

5.57

Gross Margin (%)

99.8

99.9

99.8

99.8

99.8

99.8

99.8

EBITDA Margin (%)

71.2

67.7

76.7

75.7

77.7

79.5

80.3

Operating Margin (before GW and except.) (%)

70.7

67.2

76.4

75.3

77.3

79.2

80.0

 

 

 

 

BALANCE SHEET

 

 

 

 

Fixed Assets

861.6

967.9

1,024.4

1,152.3

1,296.1

1,475.2

1,668.5

Intangible Assets

0.8

0.2

0.0

0.0

0.0

0.0

0.0

Tangible Assets

1.1

1.0

0.7

0.9

1.1

1.3

1.5

Investments & Other

859.7

966.7

1,023.7

1,151.4

1,295.0

1,473.9

1,667.0

Current Assets

11.4

9.4

266.2

132.2

142.8

157.5

176.0

Stocks

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Debtors

9.2

8.3

11.0

9.9

11.0

12.2

12.9

Cash

2.1

1.1

255.2

122.3

131.8

145.2

163.1

Other

0.1

0.0

0.0

0.0

0.0

0.0

0.0

Current Liabilities

(35.3)

(41.4)

(134.9)

(34.9)

(34.9)

(34.9)

(34.9)

Creditors & Other

(35.3)

(26.5)

(34.9)

(34.9)

(34.9)

(34.9)

(34.9)

Short term borrowings

0.0

(14.9)

(100.0)

0.0

0.0

0.0

0.0

Long Term Liabilities

(187.9)

(46.3)

(144.9)

(130.5)

(156.9)

(200.1)

(250.1)

Long term borrowings

0.0

0.0

(100.0)

(100.0)

(150.0)

(200.0)

(250.0)

Other long term liabilities

(187.9)

(46.3)

(44.9)

(30.5)

(6.9)

(0.1)

(0.1)

Net Assets

649.8

889.6

1,010.9

1,119.1

1,247.2

1,397.7

1,559.6

NAV per share (p)

 

242

275

305

340

381

425

CASH FLOW

Operating Cash Flow

(88.0)

(14.3)

0.4

(36.6)

(48.4)

(49.7)

(50.2)

Net Interest

(9.0)

(13.7)

(14.1)

(13.0)

(11.1)

(12.0)

(13.4)

Tax

0.0

0.0

(1.5)

0.0

0.0

0.0

0.0

Capex

0.0

(0.6)

(1.0)

(1.0)

(1.0)

(1.0)

(1.0)

Acquisitions/disposals

46.7

(56.2)

(30.0)

0.0

0.0

0.0

0.0

Financing

56.1

124.7

0.0

0.0

0.0

0.0

0.0

Dividends

0.0

(5.9)

(26.3)

(29.9)

(33.4)

(34.1)

(34.7)

Cash Transferred from investments held at FV

0.0

(49.9)

140.0

47.6

53.5

60.2

67.2

Net Cash Flow

5.8

(15.9)

67.5

(32.9)

(40.5)

(36.6)

(32.1)

Opening net debt/(cash)

3.7

(2.1)

13.8

(55.2)

(22.3)

18.2

54.8

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Closing net debt/(cash)

(2.1)

13.8

(53.7)

(22.3)

18.2

54.8

86.9

Source: John Laing accounts, Edison Investment Research

Contact details

Investment portfolio by geography

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

Management team

Chairman: Dr Phil Nolan

Chief Executive Officer: Olivier Brousse

Phil Nolan is currently chairman of Affinity Water and Ulster Bank Ireland. Previously, Dr Nolan was chairman of Infinis and Sepura. Dr Nolan also served as CEO of Eircom, as an executive director of BG Group and Transco, leading the demerger of the gas network company Lattice as CEO.

Olivier Brousse became CEO of John Laing in March 2014. Prior to joining John Laing, Mr Brousse 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, Mr O’D Bourke 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: Dr Phil Nolan

Phil Nolan is currently chairman of Affinity Water and Ulster Bank Ireland. Previously, Dr Nolan was chairman of Infinis and Sepura. Dr Nolan also served as CEO of Eircom, as an executive director of BG Group and Transco, leading the demerger of the gas network company Lattice as CEO.

Chief Executive Officer: Olivier Brousse

Olivier Brousse became CEO of John Laing in March 2014. Prior to joining John Laing, Mr Brousse 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, Mr O’D Bourke 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 (Taken from Bloomberg 8/8/16)

(%)

Blackrock

13.4

Morgan Stanley

9.6

Schroders Investment Management

9.0

Standard Life

5.7

JO Hambro Capital Management

5.1

Companies named in this report

Bilfinger Berger Global Infrastructure Fund, 3i Infrastructure Fund, International Public Partnership, John Laing Infrastructure Fund, HICL Infrastructure, Bluefield Solar Inc. Fund, Foresight Solar, Greencoat UK Wind, John Laing Environmental Assets Group, The Renewable Infrastructure Group, Next Energy Solar Fund.

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Copyright 2016 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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 2016. “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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. 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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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 2016. “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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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