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Jefferies: the infrastructure trusts most vulnerable to a PFI review

Jefferies: the infrastructure trusts most vulnerable to a PFI review

The danger posed to infrastructure investment companies from Labour’s hostility to private-finance initiatives (PFI) is limited, according to the latest analysis by broker Jefferies, although listed funds from John Laing, BBGI and HICL are the most exposed.

Following on from his recent research, Jefferies analyst Matthew Hose has focused on social infrastructure investment companies’ exposure to healthcare, ‘arguably the most contentious UK PFI investments’, he says.

Using research from the Centre for Health and the Public Interest Hose, Hose identifies the London-listed infrastructure funds investing in PFI contracts that Labour might want to review, either because they are too profitable for shareholders or because the NHS Trust involved is financially distressed.

John Laing Infrastructure Fund (JLIF) holds a 30% stake in the acute hospital services project at Peterborough Hospital and BBGI (BBGI) is a 50% stakeholder in the partial redevelopment of Gloucestershire Royal Hospital where over 20% of payments by the NHS trust went to shareholders in profits.

Gloucestershire Hospitals NHS Foundation trust is in financial special measures after disclosing a big budget deficit. BBGI owns 37.5% of a contract with Maidstone and Tunbridge Wells and HICL Infrastructure (HICL) 50% of a project at Brighton’s Children’s Hospital, where both trusts are also in financial difficulties.

Hose said the funds’ NHS exposure exposure was ‘limited’ and there are ‘robust contractual protections in place’, which should mean shareholders should be ‘relatively sanguine’ about Labour’s threat. However, he added that ‘investors still need to be mindful of the risk of a policy shift to a potentially more disruptive windfall tax’ as proposed by Labour backbencher Stella Creasy.

The analyst said there had been a more immediate impact from PFI risk on fund valuations. BBGI and International Public Partnerships (INPP) trade on premiums of 11.7% while HICL and JLIF trade on premiums of 2.5% and 3.2% respectively, he said.

‘Other factors could inevitably be at play here, such as the prospect of further capital raises,’ said Hose. ‘However, it would still seem HICL and JLIF’s higher portfolio allocations to UK PFI projects are weighing on their share price.’

JLIF and HICL have the highest UK PFI investments, at 68% and 67% of their portfolios, compared to 29% for INPP and 35% for BBGI.

The disparity in premiums was also picked up by Stifel analyst Iain Scouller who believes investors should switch from INPP to HICL based on valuation. However, he does not believe valuations have been affected solely by the PFI risk but by equity issues.

‘We think the price of HICL has been depressed ahead of an equity issue and we expect some valuation recovery once that is out of the way,’ he said.

‘There is also a yield pick-up with HICL yielding 5.1% and INPP yielding 4.3%. HICL also offers lower project-specific risk with the largest 10 investments accounting for 44% of the portfolio versus 65% for INPP...We believe the switch is valid until there is some equalisation of the valuations.’

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