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Get a high yield at a discount with John Laing Infrastructure

John Laing Infrastructure Fund has fallen from a high premium to NAV to a discount
April 5, 2018

Infrastructure investment trusts typically invest in public private partnership (PPP) and private finance initiative (PFI) projects such as the construction and operation of schools, hospitals, and transport. Until recently, these trusts traded on high premiums to net asset value (NAV) as their inflation-linked high income streams were extremely popular. Exposure to physical infrastructure also provides diversification from equities, which can help mitigate downside in the event of market falls.

IC TIP: Buy at 113p
Tip style
Income
Risk rating
High
Timescale
Long Term
Bull points

Inflation-linked income

High yield

Diversification from equities

Discount to NAV

Bear points

Risk of PFI nationalisation

Discount restricts equity issuance

But after shadow chancellor John McDonnell said last year that if Labour got into power it would "bring existing PFI contracts back in-house", there was a sharp derating across the sector. Some infrastructure trusts' share prices were further weakened by the collapse of Carillion (CLLN) in January, as the contractor had provided facilities management at some the projects they invest in.

The infrastructure trusts with the most exposure to UK PFI projects and Carillion have been hardest hit. These include John Laing Infrastructure Fund (JLIF), which was trading at a 6 per cent discount to NAV as of 4 April, a stark contrast to the 23 per cent premium it was on less than two years ago in August 2016.

"The shares are trading well below our fair valuation and we retain a buy [recommendation on John Laing Infrastructure]," say analysts at broker Stifel. "We think that [the market is] pricing in a majority Labour/hard left government, and wholesale nationalisation of UK PFI is premature. Any shift in the UK political backdrop or clarification of John McDonnell's PFI plans for a less extensive nationalisation could improve sentiment."

John Laing Infrastructure Fund has a yield of 6.2 per cent, one of the highest in the Association of Investment Companies (AIC) Infrastructure sector. The trust has grown its dividend every year since launch in 2010 and its managers don't expect that Carillion's liquidation will affect its ability to pay a dividend. It aims to provide a strong, predictable dividend yield with an annual minimum target of 6 per cent on its IPO price. And it has an internal rate of return target of 7 per cent to 8 per cent.

The trust's ongoing charge, meanwhile, has recently fallen from 1.48 per cent to 1.17 per cent.

John Laing Infrastructure invests in the equity and subordinated debt of operational PPP projects. It has 65 investments, about 70 per cent of which are in the UK, with the remainder in continental Europe and North America. Its largest holding is Intercity Express Programme Phase 1, a 27.5 year contract to manufacture, deliver and maintain a fleet of 57 InterCity Express Trains for the UK Great Western main line. The project accounts for 12.6 per cent of the trust's assets.

In the event of all its UK projects being terminated, JLIF estimates it would receive compensation of approximately 87 per cent of its UK portfolio's value. And if the trust continues to trade at a discount to NAV, its ability to issue equity to finance new investment projects will be restricted as its board would not want to do this at a discount.

However, PFI nationalisation that could follow a Labour victory is not guaranteed, and the election might not be until 2022. It would also be difficult, lengthy and costly, which suggests the total termination of all contracts is unlikely, argue analysts at Stifel.

Even if the trust remains at a discount and has limited ability make new investments, 53 per cent of its assets have between 20 and 30 years left on their concession term.

So, if you are an income investor who can stomach the risks, John Laing Infrastructure Fund's steady income stream, high yield and historically wide discount to NAV make it an attractive contrarian opportunity. Buy. EA

 

John Laing Infrastructure Fund (JLIF)
PRICE:113pGEARING0%
AIC SECTOR: Sector Specialist: InfrastructureNAV:120.2p
FUND TYPE:Investment trustDISCOUNT TO NAV:6%
MARKET CAP:£1.12bnYIELD:6.2%
No OF HOLDINGS:65*ONGOING CHARGE:1.17%*
SET-UP DATE:29/11/2010MORE DETAILS:jlif.com
MANAGER START DATE:Joanne Griffin: 31/12/2014, Jamie Pritchard: 31/12/2014, Gianluca Mazzoni: 19/01/2016, David Hardy: 26/05/2017  
Source: Winterflood Securities as at 4/04/18 & *John Laing Infrastructure Fund as at 31/12/17
Performance
Fund/benchmark1-year share price  return (%)3-year cumulative share price return (%)5-year cumulative share price return  (%)
John Laing Infrastructure-14526
AIC Sector Specialist: Infrastructure average
-31948
FTSE All-Share index11737
Source: Winterflood Securities as at 04/04/18
Top 10 holdings as at 31/12/17 (%)  
Intercity Express Programme Phase 112.6
Barcelona Metro Stations L9T210.4
Connecticut Service Stations6.3
North Staffordshire Hospital5.6
Forth Valley Royal Hospital5.5
Abbotsford Regional Hospital and Cancer Centre4.2
M40 Motorway3.4
Ministry of Defence Main Building3.1
Leeds Combined Secondary School2.2
A55 Holyhead to Llandegai DBFO2.2
Source: John Laing Infrastructure Fund 

 

Sector breakdown as at 31/12/17 (%)  
Transport – rail related29.5
Health27.0
Transport – road related14.5
Education8.6
Regeneration & social housing7.8
Government buildings4.7
Justice & emergency services4.6
Street lighting3.3
Source: John Laing Infrastructure Fund