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PFI investor John Laing Infrastructure is coming home

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PFI investor John Laing Infrastructure is coming home


Guernsey-based John Laing Infrastructure (JLIF) has decided it should move to the UK and become a fully-fledged investment trust.

The £1.1 billion London-listed investment company, whose shares have fallen in response to Labour party attacks on the use of private finance in the health service, has reviewed its offshore status. In its annual report the fund said it would ask shareholders in May to approve switching its domicile onshore from the Channel island.

Chairman David MacLellan said the move was necessary to avoid the potential risks to the company as countries adapted their laws in response to the OECD clampdown on corporate tax avoidance.

‘As noted in previous reports, the company and its investment adviser have been monitoring and considering the potential and actual impact on the company of the implementation of tax changes recommended by the OECD’s Base Erosion and Profit Shifting (BEPS) initiative.

‘While the portfolio valuation reflects the expected impact of the enacted provisions regarding interest deductibility, the mechanisms for countries to amend their tax treaties for several of the BEPS recommendations, including the Action 6 recommendations concerning the prevention of instances of treaty abuse, are a further risk for the company as countries seek to bring these terms into domestic tax law,’ said MacLellan.

When JLIF launched eight years ago the tax treatment of income from bonds and property differed between open-ended funds and closed-ended investment companies, forcing many of the latter to base themselves in offshore financial centres. Since then, however, the rules around investment trusts have been updated and accommodated the assets held by the company, the chairman said.

‘The board has therefore concluded that it would be in the best interests of the company and its shareholders to become a UK investment trust to mitigate the impact of both treaty changes and changes to future tax provisions,’ MacLellan said.

JLIF is not the first investment company to ‘onshore’. Two years ago loan fund Henderson Diversified Income (HDIV) announced it would switch to the UK from Jersey and Luxembourg in response to the upheaval caused by the OECD’s measures to prevent multi-nationals diverting profits through low-tax centres.

Analysts believe JLIF has at least one eye on political risk too and is anxious to avoid being wrongly viewed as an offshore tax dodger given the Labour party’s hostility to private finance initiatives (PFI) in the NHS.

Like all listed infrastructure funds, JLIF shares have fallen in the past six months following Labour shadow chancellor John McDonnell’s onslaught on PFI in his annual party conference speech. The collapse of Carillion, a PFI contractor that JLIF used on nine of its public sector contracts, has heightened investor unease with the shares de-rating from a 14% premium over net asset value to their current discount of nearly 9% below NAV.

While political heat may be behind the shift to the UK, there is no doubt it is a big factor in JLIF looking overseas for future investments.

‘While UK projects will remain a core component of JLIF’s portfolio, it is expected that in the immediate future our focus will be on re-weighting the portfolio to overseas projects and the consequent need to protect returns by carefully managing exchange rate risk,’ said MacLellan, highlighting North America and mainland Europe.

The company made a total return, including dividends, of 9.5% on its net assets last year, ahead of analysts’ estimates. It invested £149.8 million in six new projects, covering street lighting, health, and transport.

It was forced to write-off its stake in the Roseberry Park Hospital – which made up 0.5% of the portfolio - after the lenders took the project holding company into administration in an attempt to settle an ongoing dispute about construction defects.

However, it did resolve long-standing issues with construction at Peterborough Hospital – in which JLIF has a 30% stake.

It increased its position in the Intercity Express Programme (IEP), a project to replace the fleets on the East Coast mainline and Great Western mainline, and this is now the largest position in the portfolio at 12.6%.

The second largest holding, Barcelona Metro Stations, performed as expected although the political chaos caused by Catalonia’s independence bid from Spain has delayed a crucial refinancing.

Jefferies analyst Matthew Hose retained his ‘hold’ recommendation saying the company had offset the impact of  some project difficulties with ‘value enhancements’ elsewhere.

He noted the group had £40.4 million cash at the end of 2017 and had drawn £186.6 million under its revolving credit facility. ‘The bulk of this cash has been used to fund the dividend though,’ he said, adding that being so much in debt was not ‘an ideal place to be’.

‘While the [debt] facility runs until August 2020 and excess cashflow can be used to chip away at the drawings, shareholders will still be paying keen attention to the balance sheet,’ he said.

Stifel Funds analyst Iain Scouller retained his ‘buy’ stance believing the ‘shares are trading well below our fair valuation’.

‘The shares have been weak on worries about potential nationalisation of UK PFI projects in the event of a UK Labour government and the implications of Carillion’s collapse,’ he said. ‘Our fair value is 126p, a 2% premium to our estimated NAV plus the final dividend of 3.57p.’

At 111.6p today, down 0.8p, JLIF shares yield just over 6% and stand at a 9% discount to their estimated NAV of 123p, according to Morningstar.

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