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Investment Trust Watch: infrastructure funds go cheap

19 January 2018

Investors who can stand the political risk can seize a buying opportunity in listed income funds like HICL Infrastructure following the collapse of Carillion and a critical audit office report into private finance initiatives.

Listed social infrastructure funds endured another difficult week with the collapse of contractor Carillion on Monday and the publication of a critical National Audit Office report yesterday calling into question the private financing of schools, hospitals and roads that has supplied a large part of their income-producing assets.

Shares in the investment companies with exposure to private finance initiative (PFI) contracts – HICL Infrastructure (HICL), International Public Partnerships (INPP) and John Laing Infrastructure (JLIF) – fell between 4.6% and 5.7% to Thursday’s close.

With their former double-digit share price premiums shrinking further all three found themselves in our weekly ‘cheap’ list from Numis Securities with Z-scores ranging from -2.2 to -2.9 (see first table below.

Just to recap, the Z-score is a measure used by analysts to put an investment trust or company share price in the context of its own history. Broadly speaking, a score of -2 or below is viewed as getting inexpensive, while a score of 2 or more is regarded as dear (see our second table below).

Underlining the sharp reversal in sentiment was HICL, the £2.2 billion sector leader which has 41% of its portfolio invested in possibly at-risk PFI projects in schools and hospitals. It share price stood 0.7% below net asset value on Thursday. This is the first time since the 2008 financial crisis its shares have traded at a discount having peaked at an unsustainable 31% premium to NAV in August 2016.

The liquidation of Carillion – which provided facilities management services to some of the funds’ PFI projects – has reversed the recovery their shares had made since September when Labour shadow chancellor threatened to scrap PFI funding in the NHS.

Buys for the brave

So is this another buying opportunity for income funds offering attractive yields of over 4.4%? Yes, say analysts.

Matthew Hose of Jefferies, who was the first to assess a possible windfall tax threat on PFI companies from Labour – saw the NAO report – and its reiteration of the £200 billion cost of private finance in the public sector over the next 25 years – as ‘a potential lightning rod for criticism of PFI and, therefore, the funds.’

But while this is uncomfortable for the companies and their shareholders Hose repeated his view that a future Labour government would most likely review PFI and renegotiate some of the most onerous contracts without mounting a wholesale nationalisation.

Iain Scouller of Stifel agreed, arguing that while there was little political support for PFI, most contracts would be allowed to ‘wither away’ given they would likely be close to expiry by the time any nationalisation could be implemented by a Labour administration.

Scouller has ‘buy’ ratings on all three and said INPP, on a 3.4% premium according to Numis figures, looked interesting as it had a relatively small 18% exposure to UK school and hospital PFI deals (continues below).

'Cheap' trusts Share price premium (- discount) to net asset value % Average 12-month premium (- discount) % Z-score
Carador Income Fund Redeemable (CIFR) -4.7 -2.3 -3.4
3i Infrastructure (3IN) 2.0 14.6 -3.2
GCP Infrastructure Investments (GCP) 7.3 15.2 -3.2
Carador Income Fund (CIFU) -11.3 -3.1 -3.0
International Public Partnerships (INPP) 3.4 10.1 -2.9
GCP Asset Backed Income (GABI) 2.6 7.4 -2.9
Doric Nimrod Air Two (DNA2) 18.6 55.8 -2.8
Doric Nimrod Air One (DNA)  -5.8 30.2 -2.8
Doric Nimrod Air Three (DNA3)  33.3 83.7 -2.6
Yatra Capital (YATRA)  -32.5 15.9 -2.6
Hadrians Wall Secured Investments (HWSL)  3.8 8.3 -2.6
Leaf Clean Energy (LEAF)  -50.8 -39.8 -2.6
John Laing Infrastructure (JLIF) -1.5 9.6 -2.2
HICL Infrastructure Co (HICL) -0.7 8.4 -2.2

Source: Numis Securities 18/1/18

Other infrastructure funds

Similarly, the analyst also highlighted 3i Infrastructure (3IN) as a ‘buy’ with the extra attraction of a possible big pay-out to shareholders following the sale of two of its biggest assets in December. ‘The shares look interesting given only around 10% of NAV is in UK PFI and a return of cash to shareholders is expected in the first half of 2018,’ he said.

With its net asset value adjusted for these disposals its shares stand on a premium of just 2% - lower than we have previously reported – and far less than the 14% average of the past year. It pays two dividends a year and yields 4.4%.

GCP Infrastructure Investments (GCP) – which invests in the bonds of PFI projects – also looks inexpensive for investors who can stomach the political risk. It sits on a 7% premium and a -3.2 Z-score having stood on an average 15% premium to NAV in the past year. With a yield of over 6% it recently raised £100 million in an over-subscribed share issue, £40 million more than it was looking for.

It is not to be confused with £250 million sister fund GCP Asset Baked Income (GABI), which has a similar mandate but invests in shorter-dated bonds of around 11 years to maturity, according to Numis. Its shares have also taken a knock and stand on a comparatively modest premium of 2.6% to NAV and a 6% yield.

The deal with Doric

This week has also seen developments in the Doric Nimrod Air funds following Emirates' announcement that it will buy 20 A380 superjumbos from Airbus. We covered the reduction in their share price premiums in this column two weeks ago and they remain in our list of 'cheap' shares. There is a lot to say about this, however, so I will return to the topic in a separate article next week.

'Expensive' trusts Share price premium (- discount) to net asset value % Average 12-month premium (- discount) % Z-score
Pacific Alliance China Land (PACL) -12.0 -18.7 3.9
Jupiter European Opportunities (JEO) 2.8 -3.1 3.8
Impax Environmental Markets (IEM) -4.1 -10.7 3.8
Alternative Liquidity (ALF) -42.0 -74.8 3.3
Geiger Counter (GCL)  Geiger Counter (Ordinary Share) 21.3 -2.7 3.2
India Capital Growth (IGC) -5.5 -15.9 3.0
Scottish IT (SCIN) -6.8 -9.2 3.0
JPMorgan Smaller Companies (JMI) -13.6 -19.0 2.9
Draper Esprit (GROW) 15.4 -3.2 2.9
North American Income (NAIT) -4.1 -8.2 2.8
Aberdeen Private Equity (APEF) -0.6 -14.9 2.8
Schroder Asian Total Return (ATR) 5.5 -1.7 2.7
HBM Healthcare Investments (HBMN) -10.8 -21.1 2.7
Weiss Korea Opportunity (WKOF) -0.4 -4.4 2.7
Dunedin Enterprise (DNE) -10.3 -38.5 2.6

Source: Numis Securities 18/1/18

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