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Ian Cowie: Carillion crisis confirms infrastructure shares were too high

Ian Cowie: Carillion crisis confirms infrastructure shares were too high

One day we are told that private finance initiative (PFI) outsourcing firms are ‘fleecing’ taxpayers to pocket easy profits but then we learn Carillion has gone bust after bidding too low on big projects with wafer-thin margins. Bit odd, isn’t it?

Two views make a market, of course, although they can’t both be right, can they? However, many politicians seem breezily capable of holding both opposing views at once.

The same stewards of public funds now profess to be shocked to discover that hiring the cheapest builder has not produced the best outcome. Surely this should only surprise the type of people who might be amazed to hear about the Pope’s religious affiliations or the sanitary arrangements of bears in the woods?

Carillion looks like a classic example of a bad balance sheet. On the left there is nothing right, and on the right there is nothing left. Worst affected will be employees of the PFI company but shareholders in some infrastructure investment companies have also taken a bit of a hit.

Fortunately, it is an ill wind that blows no good and there appears to be at least one winner as well as three losers in this specialist sub-sector. HICL Infrastructure (HICL) has the largest exposure to Carillion with 14% of its portfolio involving the firm as its facilities manager, while John Laing Infrastructure (JLIF) has 8.5% of its portfolio – equivalent to 9.6% of net asset value (NAV) – engaged with the group. International Public Partnerships (INPP) has a smaller exposure at 3% of the portfolio, while BBGI (BBGI) confirmed that it has no exposure to Carillion.

Kieran Drake, research analyst at Winterflood Investment Trusts, pointed out: ‘The difficulties at Carillion have been well-flagged. HICL highlighted its contingency planning back in November when it took a £5 million to £10 million provision to reflect increased counterparty risk.

‘However, the failure of Carillion could also rekindle negative political sentiment regarding the PFI model that was seen at the Labour party conference in September last year.’

You can say that again, Kieran. Carillion is merely the latest event to create the impression that the Conservatives are a fag-end government, in office but scarcely in control, and looking increasingly accident-prone. You don’t need to be a Tory to regret this because the alternative is a clique of old-fashioned Marxists who regard saving and investment as deviant activities that deserve punitive taxation.

Nobody loves a smart Alec but I cannot resist pointing out that the woes of some infrastructure investment trusts should come as no surprise to readers of Citywire. Back in June, 2017, I warned that valuations in this space were looking frothy in an article headed: ‘Infrastructure party is getting out of hand’.

I pointed out that this £9 billion sector had ballooned in size with HICL growing assets under management nearly 10 times in little more than a decade. In particular, the article noted:

‘The rear-view mirror of past performance looks pretty rosy but yesterday’s river grinds no flour and investors today are hoping to buy income and gains tomorrow.

‘Overpaying now is not a good start and, while the average investment trust share price is 3.5% below these pooled funds’ net asset value (NAV), the average infrastructure trust trades at a whopping 15.4% premium to NAV. The biggest investment trusts in this sector are even more expensive than that. For example, 3i Infrastructure (3IN) trades on a 16.4% premium, HICL is priced 16.7% above NAV and John Laing Infrastructure shares cost 17% more than its underlying assets.’

It’s fair to say that some readers were cynical about my scepticism. Since then, HICL and JLIF’s premia have collapsed to 4.2% and 5.6% respectively, while 3IN and BBGI are priced at 19% and 15% above NAV, according to the Association of Investment Companies.

Their yields are pretty attractive, however, respectively being 5%; 5.6%; 3.8% and 4.6% which is why on 16 November I warmed to the sector after John McDonnell's threat to nationalise PFI deals in the NHS with a piece entitled ‘Thanks to Labour, infrastructure funds look good value’.

Since then the shares have stabilised. While I continue to believe this sector looks vulnerable to news events some of this is now reflected in their price.

However, just as Carillion’s catastrophe serves to warn investors to beware corporate hype, collateral damage among infrastructure funds should flag up the risks of buying investment trusts at double-digit premia.

Full disclosure: here is a complete list of Ian Cowie’s stock market investments. It is not financial advice nor is any recommendation implied.


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