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Hospital disputes dent growth at John Laing Infrastructure

12 September 2017

High yielding investor in public-private partnership projects reports a ‘rare’ period of underperformance in the first half of the year due to two contractual disputes.

John Laing Infrastructure (JLIF) has reported a ‘rare’ period of underperformance due to ongoing disputes and a review of cladding on its high-rise buildings following the Grenfell fire.

In the six months to 30 June, the infrastructure fund that invests in public-private partnership (PPP) projects, reported a total shareholder return of 6.2%, below the 6.9% return from the FTSE All Share.

The trust, whose share price trades at premium of 11% above their net asset value, isn’t officially managed against a benchmark but the investment manager John Laing Capital Management said due to the government-backed and partially inflation-linked revenues, the fund should ‘theoretically broadly track the capital performance of the prevailing 15 year index-linked UK gilt’.

The share price outperformed the gilt capital performance in the early part of the year but by the end of the first quarter the capital performance was similar.

The £1.2 billion fund added one more project to its portfolio over the period, acquiring a 50% interest in Croydon and Lewisham street lighting project for £8.2 million, bringing the total number of projects to 63.

Since June, the fund has acquired a 15% interest in the North Staffordshire Hospital project for £7.5 million, taking its stake to 90%.

The fund, which is run by David Hardy following Andrew Charlesworth's departure in May, said two of the hospitals in its portfolio - Peterborough and Roseberry Park - were the subject of ongoing disputes.

The dispute with Peterborough Hospital, in which JLIF has a 30% stake, regards ‘certain alleged construction defects relating to fire compartmentalisation within the building and other operational aspects of the project’.

Although the concerns over fire compartmentalisation were dealt with there are still ongoing discussions over the resolution of other problems.

‘The outcome is not anticipated to have material impact on the valuation of the portfolio or its expected investment income,’ said the manager.

‘A provision based on what is our current view of the most likely outcome has been included in the portfolio valuation.’

Problems at Roseberry Park Hospital remain unresolved, including operation of the service desk and alleged construction defects.

‘Throughout the period, we have continued to invest significant effort and resources in finding a solution, and we will continue to do so, said the manager. ‘We have included a provision within our valuation based on our current view of the situation. The project represented less than 0.5% of the portfolio value.’

Jefferies analyst Matthew Hose, who has a ‘hold’ recommendation on the trust, said the ‘provisions against certain projects have led to some rare underperformance of the discount rate unwind during the period’, which has meant the portfolio growth is £3.8 million below that would have been expected.

Hose noted the reduction in the third-party acquisition fee, from 0.75% to 0.37%, is ‘helpful at the margin’.

On top of these disputes, the trust was forced to undertake a review of the cladding on some of its high-rise social housing projects following the Grenfell Tower fire in June that killed 80 people.

There is particular concern over the use of aluminium composite material (ACM), which JLIF has discovered at one of its buildings in Cambden, north London, according to analysts at Canaccord Genuity.

‘JLIF takes health and safety matters, including the fire safety of buildings in our portfolio, very seriously and we are continuing to work closely with our public-sector clients, in particular at projects with high-rise accommodation, to ensure appropriate risk assessments are in place and that residents and users feel safe,’ said Paul Lester, chairman of the trust.

The trust is currently looking outside of the UK for opportunities due to the increased competition in the market as interest rates remain low and investor demand for low-risk, income-producing assets increases.

In May, shareholders approved changes to the investment policy that will allow the trust to invest in more countries, while retaining 50% of assets in the UK.

In particular the trust is looking at transport investment in Chile and has had ‘advanced discussion on one opportunity’.

‘The Chilean market remains highly sought after by foreign institutional investors trying to gain exposure to the South American country. Similarly, the Australian secondary market has been active, particularly in the social and transport sectors where significant privatisation has taken place,’ said the trust.

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