John Laing Group H118 results Project investment delivers growth Investment companies 10 September 2018 Continuity of strategy and personnel has enabled John Laing Group (JLG) to capitalise on the opportunities in the international market for Price 313.0p infrastructure investment and establish an impressive track record of Market cap £1,536m growth. With the demand for infrastructure projects remaining strong, we believe JLG is well placed financially, operationally and competitively to Net cash (£m) at 30 June 2018 234 deliver attractive returns to shareholders. (company definition) Shares in issue 490.8m NAV/share EPS* DPS* P/NAV P/E Yield Free float 100% Year end (p) (p) (p) (x) (x) (%) Code JLG 12/17 281 31.9 8.9 1.1 9.8 2.8 12/18e 318 57.3 9.2 1.0 5.5 2.9 Primary exchange LSE 12/19e 354 46.3 9.4 0.9 6.8 3.0 Secondary exchange N/A Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. The 8.9p DPS figure for FY17 includes an interim dividend adjusted for the rights issue. Share price performance H1 growth exceeds expectations JLG’s H118 results demonstrated the continuing growth of the business post the March rights issue. The all-important NAV per share rose from 281p at FY17 to 307p, an increase of 9.3% (Edison last published FY18 forecast: 303p). The significant fair value (FV) movement of £193.9m was helped by a contribution from the disposal of JLG’s remaining 15% of the Intercity Express project (IEP Phase 1) at above book value but also benefitted from a change in operational discount rates (£43.2m). The unwinding of discounting (£47.8m) and reductions in construction premiums (£23.2m), embedded value within the portfolio, also contributed % 1m 3m 12m significantly to the FV movement. The IAS 19 pension gain, which we had not Abs 10.2 8.3 16.8 included in our forecasts, added 6p/share to NAV growth. DPS increased 2.9% to Rel (local) 16.0 14.3 17.7 1.80p per share. In total, JLG has achieved a CAGR in NAV per share, including dividends, of 15.5% in the period 2015–2017. 52-week high/low 316.2p 239.9p Business description JLG well placed to exploit market opportunities John Laing is an originator, active investor in, and The key drivers for infrastructure investment remain in place: population growth, manager of greenfield infrastructure projects. It urbanisation and tightening environmental standards. JLG is positive on the operates internationally and its business is focused outlook, particularly in North America, and the pipeline of potential investment on the transport, energy, social and environmental sectors. opportunities now stands at £2,300m (75 projects) (+7% vs FY17 £2,150m). Of the total pipeline, JLG classifies c £500m as short- to medium-term opportunities, split c £325m Public Private Partnership (PPP) and £186m renewable energy. Demand Next events for secondary assets also remains strong, enabling JLG to preserve the yield shift. Pre-close update December 2018 Analyst Valuation: Premium to NAV; discount to peers Graeme Moyse +44 (0)20 3077 5700 After the recent strong performance, JLG’s shares trade at a small premium (c 2%) [email protected] to the H118 NAV per share of 307p. The share price is now broadly in line with our Edison profile page revised FY18 forecast NAV per share of 318p. However, despite its recent strong run, JLG stands at a discount to peer group averages (c 8% premium). At a 8% John Laing Group is a premium to H118 NAV per share of 307p, JLG would be worth c 332p/share. Given research client of Edison the undemanding relative rating, proven track record of growth and the prospect of Investment Research Limited continuing increases in the NAV per share and DPS, we believe JLG offers the potential for attractive returns for investors. Investment summary Company description: Originator and investor in infrastructure projects JLG originates, invests in and manages portfolios of infrastructure projects. The business operates in selected geographical markets – Asia-Pacific, North America and Europe – and is focused on the transport, environmental and social sectors. At 30 June 2018, the value of the investment portfolio of 41 projects, and JLG’s 2.4% holding in JLEN was valued at £1,259.7m. The assets are split between projects under construction, primary (c 50.5%), and operational projects, secondary (c 49.5%). JLG has separately listed two funds on the London Stock Exchange: John Laing Environmental Assets (JLEN in 2014) and John Laing Infrastructure Fund (JLIF in 2010). JLG retains c 2.4% of JLEN. Valuation: Small premium to historic NAV per share After the recent strong performance, the shares are trading at a small premium (c 2%) to the H118 NAV per share of 307p, (average 2015–18 of -4%; maximum +12%, minimum -18%). The valuation is broadly in line with our revised FY18e forecast NAV per share of 318p (Exhibit 3). However, despite its recent strong run JLG stands at a discount to peer group averages (c 8% premium). At a 8% premium to the last disclosed NAV per share of 307p JLG would be worth c 332p/share. Given the relative rating, proven track record of growth and the prospect of continuing increases in the NAV per share and DPS, we believe JLG continues to offer potentially attractive returns to investors. Further growth in portfolio valuation expected We set out our assumptions for the movement in the basic components of the portfolio value in Exhibit 1. We also show our revised assumptions for growth in NAV per share and DPS. Following the recent strong H118 results, we have increased our forecast for NAV per share growth (Exhibit 3). The increase, in large part, reflects an assumption of a greater FV movement. Exhibit 1: Movements in portfolio value, NAV and DPS £m 2016 2017 2018e 2019e 2020e Opening value 841.4 1,175.9 1,193.8 1,460.1 1,678.7 Cash invested 301.5 209.9 250.0 250.0 250.0 Cash yield (34.8) (40.2) (49.2) (56.5) (64.8) Investment realisations (146.6) (312.5) (250.0) (250.0) (250.0) Asset transfers 0.0 0.0 0.0 0.0 0.0 Rebased asset value 962 1,033 1,144.6 1,403.6 1,613.8 Total FV movement 214.4 160.7 315.5 275.1 311.5 Closing value 1,175.9 1,193.8 1,460.1 1,678.7 1,925.3 NAV (p/share) 254 281 318 354 397 DPS (p/share) 8.15 8.9* 9.2 9.4 9.6 Source: Edison Investment Research. Note: *The DPS figure for FY17 includes an interim figure adjusted for the rights issue bonus factor. Sensitivities: Discount rates and foreign exchange remain key JLG’s business remains sensitive to changes in discount and foreign exchange rates. Portfolio valuation: JLG has stated that a 0.25% increase in the discount rate applied to the DCF valuation of its projects would reduce the value of the investment portfolio by £42.6m. Foreign exchange: JLG has stated that, prior to hedging, +/- 5% in the value of sterling against the relevant currencies would result in a c £40m decline/increase in the value of the portfolio. John Laing Group | 10 September 2018 2 NAV and DPS returns The continuity of strategy and senior management has enabled JLG to successfully exploit the opportunities in the international market for infrastructure investment. In H118 the net asset value rose 9.3% and the DPS increased 2.9%. In the previous three years to the end of 2017, the company achieved a CAGR in NAV per share, including dividends, of 15.5%. Infrastructure and renewable energy focus JLG is an originator, active investor in and manager of infrastructure projects. The business is organised into three key areas; primary, secondary and asset management. The primary business focuses on sourcing, originating and bidding for greenfield sites. Capital is recycled by selling assets once they are operational. The secondary business concentrates on ownership of renewable energy and PPP projects. JLG invests globally and the portfolio is well diversified by asset type. The asset management business actively manages JLG’s own investment portfolio as well as providing services to two external funds, JLIF and JLEN. Value creation from investment and management of infrastructure JLG’s strategy is to create value for shareholders (as shown by NAV per share and DPS growth) as a result of its origination, investment and management of international infrastructure assets. In targeting primary investment, JLG identifies jurisdictions that possess stable political and regulatory environments, demonstrate a commitment to privately financed infrastructure and allow JLG to work with trusted partners. In addition, projects must be based on realistic targets and offer a strong secondary market for assets. Portfolio value enhancement can be achieved through a variety of techniques, including reduction of asset replacement costs, management costs and purchasing costs. JLG has also targeted fee income from managing external assets (for JLIF and JLEN); we believe this will continue as an element of its strategy, albeit with the possibility of the loss of revenue from JLIF in light of the current recommended offer. Will Samuel replaces Phil Nolan as chairman Phil Nolan, chairman of JLG since 2010, stepped down after the AGM in May and has been replaced by Will Samuel, who originally joined the board as chairman designate in December 2017. Will is also chairman of Tilney Group and was previously chairman of TSB, Howdens Joinery and Ecclesiastical Insurance Group.