The announcement at the start of the week of a bid approach for John Laing Infrastructure (JLIF) has electrified the listed social infrastructure funds sector, reversing some of the share price falls that have followed the Labour party’s attacks on private finance initiative (PFI) financing in the public sector and the collapse of Carillion.
The 18% leap in JLIF’s share price on Monday clearly put it at the top of our list of risers for the week (see first table below). HICL Infrastructure (HICL) and International Public Partnerships (INPP), two rivals that both have UK and PFI-focused portfolios, also made the risers’ list with gains of 4% and 3% respectively.
|Week's top risers||Monday's closing price (p)||Previous week's closing price (p)||Change|
|John Laing Infrastructure (JLIF)||139.60||118.40||17.9%|
|Leaf Clean Energy (LEAF)||19.00||16.50||15.2%|
|Macau Property Opportunities (MPO)||199.50||182.74||9.2%|
|Lindsell Train IT (LTI)||105250.00||97700.00||7.7%|
|British & American (BAF)||70.00||65.00||7.7%|
|Allianz Technology (ATT)||1547.50||1447.50||6.9%|
|Crystal Amber (CRS)||236.00||225.00||4.9%|
|River & Mercantile UK Micro Cap (RMMC)||207.00||197.50||4.8%|
|HICL Infrastructure Co (HICL)||151.00||145.00||4.1%|
|Draper Esprit (GROW)||550.00||530.00||3.8%|
|CATCo Reinsurance Opportunities Fund (CAT)||0.63||0.61||3.3%|
|VinaCapital Vietnam Opportunity (VOF)||319.00||309.00||3.2%|
|Pershing Square Holdings £ (PSH)||1156.00||1120.00||3.2%|
|International Public Partnerships (INPP)||148.80||144.40||3.0%|
|Gresham House Strategic (GHS)||1025.00||995.00||3.0%|
Source: Numis Securities 16/7/18
More significantly, the price spikes have removed the discounts at which the three and also BBGI (BBGI) had fallen to. Having traded at lows of between 1.5% and 10% below net asset value (NAV), all four now stand at premiums above NAV.
The most dramatic re-rating, of course, has occurred at JLIF, which on Monday closed at a 12.7% premium to Numis’ estimated NAV of 123.9p in response to the indicative cash offer of 146.07p per share (including a 3.57p dividend) from Dalmore Capital and Equitix.
Note, estimated NAVs are particularly important in infrastructure funds as the assets are only re-valued every quarter with the last official NAV for JLIF of 121.9p published for 31 March.
Surprisingly perhaps, JLIF’s conversion from a 11% discount to a near 13% premium isn’t enough to put it into Numis’s list of ‘expensive’ trusts (see second table below). That’s because our table is ranked on one-year ‘Z-scores’, which we prefer as they are more likely to highlight significant buying and selling opportunities.
However, although we don't publish it here, JLIF does sit on top of a table of three-month Z-scores, with a very expensive score of 6.9, followed by HICL on 4.2, both indicating the sharp improvement in their share price ratings.
|'Expensive' trusts||Share price premium (- discount) to net asset value %||12-month average premium (- discount) %||Z-score|
|Jupiter UK Growth (JUKG)||0.6||-2.2||3.0|
|Marble Point Loan Financing (MPLF)||6.8||4.6||2.9|
|Baillie Gifford UK Growth (BGUK)||-4.8||-11.0||2.9|
|Allianz Technology (ATT)||5.2||-1.8||2.8|
|Oakley Capital Investments (OCI)||-21.1||-28.0||2.3|
|Draper Esprit (GROW) Draper Esprit PLC (GROW.L)||47.8||10.2||2.3|
|Phaunos Timber (PTF)||-7.2||-16.0||2.2|
|Fidelity Asian Values (FAS)||0.5||-4.8||2.2|
|Aberdeen Diversified Income & Growth (ADIG)||0.3||-3.7||2.2|
|Picton Property Income (PCTN)||3.8||-1.2||2.1|
|Dunedin Smaller Companies (DNDL)||-10.5||-16.8||2.1|
|NB Distressed Debt - Extended Life (NBDX)||-10.4||-16.2||2.1|
|Aseana Properties (ASPL)||-15.5||-23.5||2.1|
|Terra Capital (TCA)||-4.1||-15.3||2.1|
|NB Distressed Debt Investment (NBDD)||-8.7||-18.6||2.0|
Source: Numis Securities 16/7/18
Just to recap, a Z-score is a measure used by analysts to put an investment trust discount – shares trading below NAV – or premium – shares trading above NAV – into context of the trust’s price history.
Roughly speaking, a Z-score of -2 or below shows a trust is significantly below its one-year trading range and is therefore ‘cheap’ and a potential buying opportunity. Conversely, a Z-score of 2 or more trades above its one-year range is seen as potentially ‘expensive’ and perhaps worthy of some profit taking (see second table below).
Here is the list of 'cheap' trusts at Monday's close.
|'Cheap' trusts||Share price premium (- discount) to net asset value %||12-month average premium (- discount) %||Z-score|
|Fair Oaks Income 2014 (FA14)||5.2||27.4||-3.9|
|AEW UK Long Lease REIT (AEWL)||-4.8||3.6||-3.8|
|Ashmore Global Opportunities - US$ (AGOU)||-34.8||-13.0||-3.6|
|Regional REIT (RGL)||-11.9||-2.7||-3.6|
|Leaf Clean Energy (LEAF)||-79.4||55.9||-3.4|
|European Assets (EAT)||-5.1||0.5||-3.0|
|Sherborne Investors (Guernsey) C (SIGC)||-4.8||5.6||-2.9|
|Fondul Proprietatea GDR (FP/)||-33.9||-28.3||-2.9|
|JZ Capital Partners (JZCP)||-40.2||-33.3||-2.8|
|F&C UK Real Estate Investments (FCRE)||-10.0||0.0||-2.4|
|Temple Bar (TMPL)||-7.0||-5.2||-2.4|
|Gabelli Merger Plus (GMP)||-1.8||4.0||-2.4|
|TR European Growth (TRG)||-13.6||-4.1||-2.3|
|Origo Partners (OPP)||-93.3||-82.4||-2.2|
|BlackRock World Mining (BRWM)||-14.1||-11.5||-2.1|
Source: Numis Securities 16/7/19
What does this mean for JLIF?
JLIF's de-rating was particularly pronounced because in addition to a big exposure to NHS PFI - the particular subject of Labour's shadow chancellor ire last September - it also had exposure to political risk in Catalonia through a 40% stake in the company running Barcelona's Line 9 subway.
With Dalmore-Equitix potentially offering a 20% premium to JLIF's end of March NAV, analysts have debated whether investors should pocket their gains and move on or hold out for more should a counter-bidder emerge.
Having only upped their recommendation on JLIF from 'hold' to 'buy' in March, Alan Brierley and Ben Newell of Canaccord Genuity reluctantly reversed their stance, commenting:
'In terms of our short-term recommendation on John Laing Infrastructure, given further upside to the offer level, the proposed dividend, the relatively short time-scale, and the possibility of a higher offer from other institutional investors, we are inclined to downgrade to a "hold" recommendation, as we acknowledge execution and political risks.'
Like other analysts, the Canaccord duo believe the stock market has underestimated the scarcity value of the assets held by the listed infrastructure funds and the attractiveness of their long-term and frequently inflation-linked revenues.
Using recent off-market transactions involving infrastructure assets they calculate JLIF’s NAV at 30 September will be 128p per share, 6.1p more than the 31 March valuation. On that basis the premium on the consortium’s offer is reduced to a more modest 11%.
Significantly, one of these transactions was the sale by John Laing Group (JLG), the construction company that owns JLIF’s fund manager John Laing Capital Management, of a 15% stake in a contract to supply a fleet of Hitachi Intercity Express Trains for use on the Great Western railway.
John Laing sold the stake in IEP Phase 1 to AXA for £227.5 million in May. This is significant because JLIF also owns a 15% stake which it valued at only £174 million at 31 March. Using the transaction valuation adds 5.4p to JLIF’s NAV per share, with the remaining 0.7p coming from the income the Canaccord analysts say JLIF will have accrued by the end of September.
The analysts also note another significant transaction in April in which Equitix, one of the consortium bidders for JLIF, bought the Highland Schools PPP (public-private partnership) from HICL, to which Canaccord is corporate broker, paying £56.2 million, a 21% premium to the carrying value on HICL’s books.
Numis analysts led by Charles Cade have done similar analysis, but advised investors to take profits.
'In our view, the premium is an attractive price for JLIF shareholders providing a potential exit from a name where we felt the share price was likely to be negatively impacted by the perception of political risk.'
The question then is where to re-invest?
Numis eyes HICL and INPP
Although the bid for JLIF is not yet formal, Numis believes it underlines the 'attractive buying opportunity' in the three other UK-focused social infrastructure funds, BBGI, HICL and INPP, which judging from the approach for JLIF could be worth 14%-18% more than their current share prices indicate (see table below).
Numis is corporate broker to INPP and has held a 'buy' rating on it for seven years. It upgraded HICL to 'buy' at the start of the year and says both have higher quality portfolios and offer better inflation protection than JLIF, making them appealing to pension funds looking to match long-term liabilities.
'We believe investors that have previously avoided the sector due to high premiums, could see current valuations as an attractive entry point. We also see the poential for sentiment to improve through further asset sales at above carrying value.'
|Monday's share price (p)#||Implied share price at 19.8% premium||Upside||Share price premium (- discount) to net asset value % ##|
|HICL Infrastructure (HICL)||152.6p||179.7p||17.70%||0.7|
|International Public Partnerships (INPP)||147.6||174p||17.90%||2.4|
Source: Numis Securities
#Current share price was taken during trading on Monday. BBGI finished Monday at 137.8p, HICL 151p and INPP 148.8p.
## Premiums are at Monday's close of trading.
And just to round off this Investment Trust Watch special, here is the list of the biggest falling closed-end funds in the week to Monday.
|Week's big fallers||Monday's closing price (p)||Previous week's closing price (p)||Change|
|Myanmar Strategic Holdings (SHWE) Myanmar Strategic Holdings Ltd (SHWE.L)||9.50||16.00||-40.6%|
|Ashmore Global Opportunities - US$ (AGOU)||4.01||6.31||-36.6%|
|Ashmore Global Opportunities - £ (AGOL)||455.00||652.77||-30.3%|
|Phoenix Spree Deutschland (PSDL)||331.00||351.00||-5.7%|
|BlackRock Commodities Income (BRCI)||78.90||83.60||-5.6%|
|Dolphin Capital Investors (DCI)||6.15||6.50||-5.4%|
|BlackRock World Mining (BRWM)||366.50||381.50||-3.9%|
|Downing Strategic Micro-Cap (DSM)||88.00||91.40||-3.7%|
|Aurelius Equity Opportunities (AR4)||50.75||52.65||-3.6%|
|DeA Capital (DEA) DeA Capital SpA (DEAEUR.Lp)||1.27||1.31||-2.9%|
|Tetragon Financial (TFG)||12.35||12.70||-2.8%|
|Fondul Proprietatea GDR (FP)||11.00||11.30||-2.7%|
|Alpha Real Trust (ARTL)||129.00||132.50||-2.6%|
|Reconstruction Capital II (RC2)||0.19||0.19||-2.6%|
Source: Numis Securities 16/7/18