Political fears overblown at John Laing

John Laing’s business is made up of three parts. The primary investment business focuses on projects under construction. These span transport, environmental assets and so-called 'social infrastructure', such as stadiums and hospitals. Completed projects – mostly PPPs or renewable-energy projects – sit within the secondary investment business. The first two businesses are of roughly equal size by asset value – a little over £600m each. Third, the group also sells investment management services to its listed funds, John Laing Infrastructure Fund (JLIF) and John Laing Environmental Assets (JLEN), as well as project management services to other companies.

For John Laing to continue to grow, it must be able to source or successfully bid for enough projects, which has prompted serious concerns, especially since the collapse of Carillion early this year. Many of its projects are PPPs, so investors are rightly worried about growing hostility, especially within the Labour Party, towards private companies' involvement within public services. However, increasingly John Laing bids for contracts overseas, most notably in the US. Analysts at HSBC Global Research estimate a combination of diversification and divestments mean its UK PPP projects have fallen to 26 per cent of the portfolio, less than 1 per cent of which is in social infrastructure, the segment judged to be most at risk politically.

Besides, as fears about the UK have risen, markets elsewhere have opened up. In 2017, the group’s new commitments totalled £383m, miles ahead of its guided £200m and more than double the figure from any previous year. In March, John Laing raised £210m via a one-for-three rights issue and its bosses plan to invest the proceeds over the next three years in the increased pipeline of opportunities. Bidding activity was slow to get going in the first few months of 2018, but by the end of the first half the pipeline had more than recovered, ending up at £2.3bn from £2.15bn previously.

Of course, investors should not read too much significance into the value of work yet to be won, but in recent years the group has had a win rate of around one-in-three bids. Investment commitments were lower in the first half of 2017-18 £39.2m compared with £111m in the previous first half. However, management maintains its full-year guidance of £250m.

In spite of this, net asset value (NAV) and pre-tax profits both ended the period well up – 12 per cent and 128 per cent, respectively, ahead of estimates from Barclays Capital. Both figures were buoyed considerably by the disposal of the group’s remaining 15 per cent stake in the first phase of the Intercity Express Programme. The jump in NAV surprised investors and prompted the share price to climb within striking distance of 2018's forecast figure. Yet a sum-of-the-parts valuation from broker Peel Hunt in March indicated a fair value of roughly 439p a share. True, the broker has yet to calculate an updated figure, but NAV growth would imply an underlying figure closer to 479p a share now.

As John Laing’s primary and secondary businesses have grown, a cash offer for John Laing Infrastructure Fund has cast some shadow over the asset management division. The infrastructure fund was created in 2010 when it acquired a portfolio of 19 assets from John Laing, which has since provided investment management services. The offer comes from a consortium of investment firms Dalmore Capital and Equitix Investment Management, and introduces the risk that the infrastructure fund will terminate Laing's investment management contract, which would be a black eye for management’s plan to increase the division's assets under management. However, the offer values the infrastructure fund at 20 per cent above NAV and that simply underlines that John Laing's share price, sitting below its own likely NAV for the year just ended, is undervalued.