10 March 2021 John Laing Group’s (JLG) performance improved significantly in H2.
Activity levels (short-listed positions, investments and realisations) all picked up and underlying NAV/share grew 5%. This rebound looks set to continue into FY21 as JLG implements its new strategy amid a resurging infrastructure market. Its greenfield business model gives investors a unique way to gain exposure to this growth. While foreign exchange headwinds may mask growth in underlying NAV/share in FY21, for FY22 we forecast a 7.6% total return (ie growth in NAV/share plus dividend).
Year end NAV/share
(p) Diluted EPS*
(p) DPS
(p) P/NAV
(x) P/E
(x) Yield
(%)
12/19 337 20.2 9.5 0.94 15.6 3.0
12/20 310 (13.3) 9.7 1.02 N/A 3.1
12/21e 306 10.0 11.4 1.03 31.6 3.6
12/22e 317 18.9 8.8 1.00 16.7 2.8
Note: *EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
FY20: A year of transition
Following a weak H1 (see Reset and refocus) activity levels picked up in H2. JLG added four new shortlisted PPP positions, increased investments to £98m, disposed of its IEP East and Australian wind farm portfolio (total proceeds up to
£580m), while underlying NAV/share grew 5% h-o-h. The geographic, sectoral and investment stage mix of the portfolio changed significantly over FY20 and new CEO Ben Loomes set out his Grow, optimise and enhance strategy.
FY21: A year of implementation
The focus in FY21 is executing this new strategy. JLG has already made key hires (including a new CFO) and secured its first two (exclusive) shortlisted positions for core-plus projects (in FTTH and accommodation). The company is also seeing activity in EV charging infrastructure and is progressing inbound interest in its current portfolio. Countries are raising investment to stimulate their economies post COVID-19, creating a ‘structurally favourable market for infrastructure’.
Forecast: FX masks progress in FY21; growth in FY22
We forecast a 4% increase in underlying NAV/share in FY21 primarily driven by further solid growth in the PPP portfolio. However, rebasing to current FX rates leads us to lower our headline FY21 NAV/share forecast to 306p (312p previously).
Our FY21 dividend forecast of 11.4p is underpinned by £356m of net proceeds already secured. By FY22 we expect JLG’s new strategy to begin to accelerate growth. We introduce a headline FY22 NAV/share forecast of 317p, 7.6%
underlying growth.
Valuation: Structural growth at a discount to peers
At 316p, JLG trades at 1.03x our rebased FY21 NAV/share forecast, a discount to both its historical (1.07x) and peer group average (1.16x) ratings. FY20 realisations underpin an FY21e yield of 3.6%. Adverse FX moves may obscure NAV/share progress in FY21 but JLG appears to be executing at pace in an infrastructure market that looks set to deliver sustained structural growth. JLG’s greenfield business model gives investors a unique way to gain exposure to these growth trends.
John Laing Group Preliminary results
From transition to implementation
Price 316p
Market cap £1,559m
Net debt (£m) at end FY20
Net debt (£m) including off-balance sheet 136 184
Shares in issue 493m
Free float 99%
Code JLG
Primary exchange LSE
Secondary exchange N/A
Share price performance
% 1m 3m 12m
Abs (1.9) (4.7) (1.8)
Rel (local) (4.4) (8.0) (14.5)
52-week high/low 373.2p 273.6p Business description
John Laing Group is an originator, active investor in, and manager of greenfield infrastructure projects. It operates internationally and its business is focused on the transport energy, social and environmental sectors.
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John Laing Group | 10 March 2021 2
From transition to implementation
FY20: A year of transition
FY20 was a year of two halves for JLG. H1 saw underlying net asset value (NAV)/share fall 10%, predominantly due to the impact of falling power price forecasts on renewable valuations (see our note Reset and refocus). However, performance improved substantially in H2. Underlying
NAV/share grew 5% (15p/share), largely due to the sale of IEP East for a c £88m (18p) premium to book value (before costs), partially offset by a further £18m (4p) decline in renewable valuations and £40m (8p) of costs. Excluding the uplift from IEP East, the value of the public-private partnership (PPP) portfolio increased by £53m (11p) in H2.
Exhibit 1: Underlying* NAV/share fell by 10% in H120 Exhibit 2: Underlying* NAV/share grew 5% in H220
Source: John Laing Group data. Note: *Excluding dividends, pension and FX. **PV = Change predominantly driven by portfolio valuation – costs.
Source: John Laing Group data. Note: *Excluding dividends, pension and FX. **PV = Change predominantly driven by portfolio valuation – costs.
Activity levels also picked up substantially in H2. JLG added four shortlisted positions in PPP (SE Metro – Waste to Energy, Frankston Hospital, Ontario Line and Potrero Bus Yard) and secured two further exclusive positions in ‘core-plus’ projects, one in the UK (accommodation) and one in Europe (fibre to the home). Offsetting this, one shortlisted PPP project was cancelled, one faces increased uncertainty and two were won by competing consortiums. Investments increased to
£98m (up from just £5m in H1) and JLG disposed of its IEP East and its Australian wind farm portfolio (gross proceeds of up to £422m and £158m respectively). The increased activity resulted in a substantial mix shift in JLG’s portfolio over the year. Renewables fell from 34% of portfolio value in FY19 to just 17% at end FY20 (Exhibit 3). European assets (excluding the residual IEP East stake) are now just 11% (previously 34%) and primary assets are just 22% (51% previously).
337
302
317 309
(35)
15 (8)
300 305 310 315 320 325 330 335 340
ReportedFY19 PV**
change Under lying fx and
pension Pre
divi Dividend H120 Reported
NAV per share (p)
NAV/share Negative move Positive move 10% underlying decline
309
324
312 310
15 (12)
(2)
300 305 310 315 320 325 330
H120 Reported PV**
change Under lying fx and
pension Pre
divi Dividend FY20 Reported
NAV per share (p)
NAV/share Positive move Negative move 5% underlying growth
John Laing Group | 10 March 2021 3 Exhibit 3: Significant mix shift in the portfolio in FY20 Exhibit 4: Total investments forecast by new/existing
commitments vs pipeline and guidance
Source: John Laing Group data Source: John Laing Group data. Note: AEP = aggregate equity
positions.
The arrival of Ben Loomes (CEO) in May was another significant development in FY20. His new
‘Grow, optimise, enhance’ strategy was laid out in a capital markets day in November and is discussed in detail in our recent Outlook note. It targets sustainable returns of 9–12% in the medium term, predominantly driven by 1) a decision to exit a declining PPP market in the UK and Europe, 2) re-investing cost savings to establish a core-plus strategy to accelerate growth and 3) further enhancing both operational and balance sheet efficiency using third-party capital. JLG has already begun to execute this strategy. The sharp reduction in both renewable and European PPP exposure during FY20 plus enlarging its stakes in the I-77 and Clarence Correctional Centre projects (in the United States and Australia respectively) are consistent with this new approach.
FY21: A year of implementation
The focus for JLG in FY21 is executing this new strategy. It has made several key hires in recent months including Rob Memmott (CFO), Christopher Reeves (ESG director), and Angenika Kunne (investment director – Core-Plus) and other senior hires are described as ‘well-progressed’.
A key priority is increasing the level of investment. JLG had already committed to invest £63m in FY21 entering the year. On top of this it is guiding to at least £100m in new commitments, implying a further £68m on top of £32m already committed to Pacifico 2 (Colombia). The aggregate value of the three preferred and short-listed PPP opportunities expected to reach financial close during FY21 (North-East Link, ViA15 and SR-400) is £106m. Adding £83m from the two core-plus projects, the total aggregate equity position of the pipeline is £189m. To meet its target effectively JLG has to close at least 36% (£68m/£189m) of its disclosed pipeline. We forecast £163m of investments in FY21 (Exhibit 4). The challenge for JLG will be increasing the pace of investment while maintaining discipline.
Further realisations are also expected. The agreed sales of IEP East (second tranche) and
Australian wind farm assets should result in proceeds of £356m in FY21. In addition, JLG describes the current level of interest in its secondary assets as high. It has received a number of unsolicited approaches, some of which it is currently progressing. Our (arguably conservative) total realisations forecast of £400m, implies an additional £37m of disposals in FY21. We would expect progress on its commitment to exit its remaining renewable portfolio (£268m) by end FY22 during FY21.
The structural growth opportunity
JLG believes the encouraging rebound in activity levels that began in H220 presages a ‘structurally favourable market for infrastructure’. Countries are seeking to stimulate their economies through investment in infrastructure. The most obvious (and largest) example is Biden’s ‘Build Back Better’
57% 47%
9% 13%
34%
17%
23%
0%
20%
40%
60%
80%
100%
2019 2020
Portfolio value
PPP (availability) PPP (volume)
Renewables Assets held for sale
63 63 75
55 109
43 32 106 83
100 150
0 50 100 150 200 250 300
2018 2019 2020 2021
(JLG) 2021e
(Edison) 2022e (Edison)
£m
Edison forecast of new commitments AEP* Core-plus pipeline AEP* PPP and projects pipeline PPP investment Existing JLG commitment
Guidance of at least £100m in new commitments in 2021 implies at least £68m more in new commitments in 2021
John Laing Group | 10 March 2021 4 programme in the US ($2tn over four years), but all of JLG’s key markets have laid out substantial infrastructure programmes in the last year (Exhibit 5).
Exhibit 5: Significant Infrastructure plans in JLG’s core markets Country Programme and comments
US Second largest infrastructure market in the world
Significant investment gap: 2016–40 spend US$8.5tn; 45% more required to address under-investment
Biden & ‘Build Back Better’ – US$2tn over four years: highways, bridges, energy grids, schools, universal broadband Australia 2016–40: total spend US$1.5tn underpinned by economic and demographic fundamentals
Federal government committed to investing A$110bn in infrastructure over the next decade; state budgets are even larger; New South Wales alone has an infrastructure pipeline of A$107bn over the next four years
UK & Europe UK: £640bn of gross capital investment into infrastructure by the end of the current parliamentary term; National Infrastructure Strategy expected to focus on broadband, decarbonisation and transport
EU: €750bn Green Deal aimed at a greener, more inclusive, digital and sustainable Europe Germany: €130bn stimulus programme including investment in sustainable mobility Colombia &
Peru Colombia: further 4G road opportunities; 5G PPP programme US$9bn Peru: updated US$5.4bn PPP pipeline announced in January 2020 Source: John Laing Group FY20 presentation, slide 40 (March 2021)
The initial focus of JLG’s core-plus strategy is likely to be digital, particularly fibre-to-the-home (FTTH) infrastructure. In our recent Outlook note Grow, optimise and enhance, we assessed this opportunity in detail. Governments increasingly recognise the strategic imperative of 1Gbit/s connectivity and existing projects show customer adoption rates (and hence returns) are consistent and predictable (Exhibit 6). However, the company also highlighted that activity in energy transition, particularly around EV charging infrastructure, is picking up.
JLG has a strong balance sheet to execute on this opportunity. The £466m in available financial resources at the end of FY20 does not include the remaining £356m in net proceeds from the sale of IEP East and the Australian wind farm portfolio. In time JLG expects to attract third-party capital to both further accelerate its execution here and leverage its existing cost base.
Exhibit 6: Rising FTTH/B* penetration in Europe Exhibit 7: FY21e NAV/share bridge*
Source: Edison Investment Research based on IDATE data for the FTTH Council Europe. Note: *FTTB = fibre to the building.
Source: Edison Investment Research. Note: *Cash dividend impact of 10p based on dividend payments expected in FY21 (not the FY21 declared dividend).
Forecast: FX impacts in FY21; introducing FY22
The scope for valuation uplifts from both the discount rate unwinding and reductions in risk premia are likely to be less in FY21 than in previous years due to a smaller primary portfolio. Offsetting that, to some extent, a smaller, rebased renewable portfolio is likely to be less of a drag. We forecast a 4% underlying increase in NAV/share (excluding FX, pension and dividend payments) driven primarily by the PPP and projects portfolio (Exhibit 7). An FY21 dividend forecast of 11.4p is underpinned by the £356m in net proceeds from already agreed realisations.
However, foreign exchange rates have moved against JLG in FY21 so far. FX was a major driver of both H1 and H2 performance in FY20 (see Exhibits 1 and 2) and, with the full disposal of IEP East,
0 10 20 30 40 50 60 70 80 90
0 20 40 60 80 100 120 140 160 180
2012 2014 2016 2018 2020 2022 2024
Penetration (%)
Bulidings passed, sunbs (m)
Subs (m) Homes passed (m) Penetration (RHS, %)
310
323
316
306 27
1 15
7
10 300
305 310 315 320 325 330 335 340
FY20 PPP &
projects Ren Opex Under lying fx and
pension Pre
divi Divi FY21e
NAV per share (p)
NAV/share Positive move Negative move
4% underlying growth
John Laing Group | 10 March 2021 5 an even larger share of assets will now be outside the UK. According to JLG at end FY20 a 1%
move in the pound sterling has an impact of £11m on the portfolio valuation. Rebasing to current exchange rates reduces our underlying FY21 NAV/share forecast 7p and leads us to forecast reported FY21 NAV/share of 306p (vs 312p previously). The new CFO (Rob Memmott) is examining a hedging strategy that would reduce the exposure of the portfolio to FX and also tackle the volatility caused by shifts in the valuation of the pension fund.
We introduce an FY22 NAV forecast of 317p, based on 7.6% underlying (ie constant currency, pre- dividend) growth driven by greater investment activity and less renewable exposure. Our forecast is in line with JLG’s guidance of a ‘step-up in growth in 2022 towards our medium-term returns target range.’
Valuation: Structural growth at a discount to peers
At 316p, JLG’s shares 1.03x our rebased FY21e NAV/share forecast, a rating that stands at a discount to both its historical (1.07x) and peer group average (1.16x) ratings. FY20 realisations underpin an FY21 yield of 3.6%. Adverse FX moves may obscure NAV/share progress in FY21, but the company appears to be executing at pace in an infrastructure market that looks set to deliver sustained structural growth. JLG’s greenfield business model gives investors a unique way to gain exposure to these growth trends.
John Laing Group | 10 March 2021 6 Exhibit 8: Financial summary
Accounts: IFRS, year-end: December, £m 2017 2018 2019 2020 2021e 2022e
INCOME STATEMENT
Total revenues 197 397 179 25 124 174
Cost of sales 0 0 0 0 0 0
Gross profit 197 397 179 25 124 174
SG&A (expenses) (59) (66) (68) (50) (50) (52)
Other income/(expense) 0 (21) 0 (28) (17) (17)
Depreciation and amortisation 0 0 0 (1) 0 0
Reported EBIT 138 310 111 (53) 57 105
Finance income/(expense) (12) (14) (11) (10) (8) (10)
Other income/(expense) 0 0 0 0 0 0
Reported PBT 126 296 100 (65) 49 94
Income tax expense (includes exceptionals) 2 0 0 (1) 0 0
Reported net income 128 296 100 (83) 49 94
Diluted average number of shares, m 372 475 496 497 497 500
Adjusted diluted EPS (p) 34.3 62.4 20.2 (13.3) 10.0 18.9
EBITDA 138 331 111 (24) 74 122
Adjusted NAV (p/share) 281 323 337 310 306 317
Adjusted Total DPS (p) 10.6 9.5 9.5 9.7 11.4 8.8
BALANCE SHEET
Property, plant and equipment 0 0 0 1 1 1
Goodwill 0 0 0 0 0 0
Intangible assets 0 0 0 0 0 0
Other non-current assets 1,347 1,700 1,914 1,687 1,506 1,633
Total non-current assets 1,347 1,700 1,914 1,688 1,507 1,634
Cash and equivalents 3 5.5 2 5 122 114
Inventories 0 0 0 0 0 0
Trade and other receivables 8 8 6 7 6 6
Other current assets 0 0 0 0 61 0
Total current assets 10 14 8 12 189 120
Non-current loans and borrowings 0 0 4 5 5 5
Trade and other payables 0 0 0 0 0 0
Other non-current liabilities 41 42 9 10 10 10
Total non-current liabilities 41 42 13 15 15 15
Trade and other payables 17 20 15 20 15 15
Current loans and borrowings 173 66 236 136 136 136
Other current liabilities 1 0 0 0 0 0
Total current liabilities 192 86 251 156 151 151
Equity attributable to company 1,124 1,586 1,658 1,529 1,530 1,588
Non-controlling interest 0 0 0 0 0 0
CASHFLOW STATEMENT
Profit before tax 126 310 111 (53) 57 105
Net finance expenses 12 0 0 0 0 0
Depreciation and amortisation 0 0 0 1 0 0
Share based payments 3 3 4 1 0 0
Fair value and other adjustments (190) (369) (174) (39) (142) (191)
Movements in working capital 2 2 (2) 3 (5) 10
Cash from operations (CFO) (47) (54) (61) (87) (90) (77)
Capex (0) 0 0 (1) 0 0
Cash transf. from inv. Held at FV (2) 58 74 61 0 0
Portfolio Investments - Disposals 79 (46) (124) 189 237 (25)
Cash used in investing activities (CFIA) 77 12 (50) 249 237 (25)
Net proceeds from issue of shares 0 210 (4) 0 0 0
Movements in debt 11 (106) 169 (101) 0 0
Other financing activities (40) (59) (58) (58) (31) 94
Cash from financing activities (CFF) (29) 45 107 (159) (31) 94
Currency translation differences and other 0 0 0 0 0 0
Increase/(decrease) in cash and equivalents 1 3 (4) 3 117 (8)
Currency translation differences and other 0 0 0 0 0 0
Cash and equivalents at end of period 3 6 2 5 122 114
Net (debt)/cash (171) (60) (238) (136) (19) (27)
Movement in net (debt)/cash over period (11) 111 (178) 102 117 (8)
Source: Company accounts, Edison Investment Research (based on JLG’s statutory accounts
John Laing Group | 10 March 2021 7 General disclaimer and copyright
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