John Laing ready to tap increased infrastructure spending

A potential uplift in infrastructure spending would suit industry giant John Laing (JLG), although a consensus-beating increase in the fair value of its portfolio during the first half of this year suggests the group is already faring well. However, despite earnings growing rapidly and impressive growth in its pipeline of future work, the shares are trading at a discount to its forecast book value per share.

John Laing operates a primary and secondary portfolio, as well as an asset management arm. Its £487m primary investment portfolio consists of 14 public private partnerships and seven renewable energy projects. The primary investment team bids for transport, environmental and social infrastructure projects in Europe, North America and Asia Pacific, and if successful develops the associated assets. Its £443m secondary portfolio consists of investments in already-operational projects, most of which were previously part of its primary portfolio. This consists of 14 PPP projects and four renewable energy projects. Its asset management division provides investment advice and management services to £1.2bn of company-owned assets as well as £1.3bn of third-party-owned assets.

The fair value of these portfolios has been steadily increasing since the group relisted in February last year. In December 2014 the group's overall net asset value (NAV), adjusted for £121m proceeds from the February 2015 IPO, stood at £771m. By June this year this had grown to £964m, thanks to a significant uplift in the value of the group's portfolio. Indeed, in the six months to June the estimated fair value of the portfolio rose by 15 per cent after adjusting for cash yield, cash invested in new projects and disposals.

Around £49m of this uplift was due to favourable foreign-exchange movements. However, the portfolio also benefited from a reduction in its discount rate to 9.1 per cent from 9.5 per cent at the end of December, reflecting the strength of the secondary market for infrastructure assets. The discount rate aims to reflect the risk associated with individual projects and the present value of expected future income.

Work booked by the group suggests its momentum isn't showing any signs of slowing. Its project pipeline was up almost a fifth to £1.78bn during the first half of the year, after prospective PPP investments shot up by more than a third to £1.34bn.

While Laing's balance sheet carries little debt, its pension scheme has been an issue. The majority of the £121m in net proceeds raised after the company listed were used to pay down its pension deficit. At December 2014 the deficit stood at £178m, but by the end of June this year had decreased to £36m. The trustees of the scheme and management agreed a schedule of annual contributions of £26.1m over a period of 10 years, increasing by 3.55 per cent each year. Yet low interest rates could still put upward pressure on the scheme's liabilities.