Fund Management Research
Written on 10/08/2018

Ken Baksh - Infrastructure funds come to the front in 2018

Public Infrastructure investment in most OECD countries is running at about 30% below the historic norm (Source: Credit Suisse), having been cut sharply through the financial crisis. Public infrastructure investment is nearly 40% below the estimated 3.5% of GDP that needs to be spent in this area. In the US for example, there is a $1.4 trillion funding gap, with for example the average age of roads being 27 years.

In the UK there is a clear bias to an easing of fiscal policy since the election. The balanced budget has been postponed, the public sector pay cap has been lifted and Chancellor Hammond has already pledged to increase government infrastructure investment to 1.0-1.2% of GDP every year from 2020 onwards. More homes and transport were high priorities mentioned in the Budget today, where the existing £23 billion infrastructure investment fund was increased and lengthened. The Labour party, if elected, have stated that they would put £500 billion into infrastructure over the next ten years!

There are four London listed investment trusts that invest predominantly in PPP/PFI concessions, with a finite life of 20-30 years. These funds typically provide risk capital   for a wide range of geographies and have varying mixes of regulated/non-regulated assets. Interest rates, foreign exchange treatment, inflation linkage are important drivers for the sector.

BBGI(BBGI)-Aims “To provide investors with secure and highly predictable cash flows by investing in equity and subordinated debt of infrastructure projects that have been developed under the PFI/PPP procurement models. Major holdings include Golden Ears Bridge (12.9% of assets-Vancouver) and M80 motorway (6.45%-Scotland). Current Yield 4.6%,13.4% premium to assets.     

HICL Infrastructure (HICL) “is a long-term equity investor in infrastructure, working with public sector clients to deliver high-quality projects which support the community and provide essential public services”. Holdings include Affinity Water, A249 road (UK), High Speed Rail Link (Holland), Croydon Schools (UK) and a RCMP divisional HQ (Canada). Prospective  yield 5.0%,4.3% premium to assets.

International Public Partnerships (INPP)-INPP” aims to provide investors with sustainable long term returns through growing dividends with the potential for capital appreciation”. Major projects include Cadent (UK gas distribution), Thames Tideway Tunnel (London),Diablo Rail Link(Belgium).Prospective yield 4.4%,8.8% premium to assets.

John Laing Infrastructure Investment Trust(JLIF) aims “To actively generate long-term sustainable value for shareholders by investing in equity and subordinated debt issued in respect of a portfolio of concession based infrastructure projects that are in their operational phase”. Projects include Barcelona Metro stations (11.8%-Spain), Connecticut Service Stations(7.5%USA),Forth Valley Hospital (6.0% Larbert,Scotland),North Staffordshire Hospital (5.5%).Prospective yield 5.68%.Premium to assets of 4.7%.  See graph below by clicking on link.

Over the last five years, the sector has traded on large premiums to assets, sometimes as much as 25%, as investors have sought high dependable income streams, in readily realisable form, that bore low correlation with either mainstream equities or gilts.
However, following the Shadow Chancellor’s comments regarding PFI at the Labour Party Conference in September and other Labour Party comments in October suggesting a windfall tax, the sector has rapidly derated.  In mid-November JLIF released a figure for the value ascribed to compensation due if all their UK PFI contracts were cancelled by the relevant local authorities., which came in at 86% of contract carrying value in NAV.In my opinion, the share price falls have been more than the worst case  scenario (Labour government, differing UK PFI exposure, instant cancellation of contracts etc) and value now exists in this sector, despite the bounce seen so far.

Over the same period the gilt yield has barely moved and thus the actual and relative yields on all four companies have risen. Clearly a classic risk reward situation has developed for anyone waiting to add/build exposure to the sector. John Laing (5.6% yield) and HICL (5.0%yield) could provide the largest upside if the worst case does not materialise with BBGI and INPP as the” safer” plays, Interestingly, my two renewable infrastructure plays, which have very little to do with PFI, have dropped slightly and also look attractive if looking for secure income streams, Bluefield 6.4% and Greencoat 5.4% and low correlation.GCP Infrastructure on a yield of 6.4% may also appeal to more fixed interest oriented investors.

In summary, depending on risk appetite, I would recommend some exposure to the area of infrastructure and or renewable investment trusts, as equity and conventional fixed interest sectors are looking increasingly vulnerable.

Sources: Credit Suisse, Winterflood, Numis, London Stock Exchange, Trustnet.

Please contact Ken for further information

Ken   20/07/2018

All news