The gravy train couldn’t roll on forever. Once a darling of the stock market, listed infrastructure funds have fallen dramatically out of favour over the past year, haunted by the spectre of a hard-left Labour government and the collapse of Carillion.
The public mood has been shifting against private finance initiatives, seen as a one-way bet for developers of schools, roads and hospitals. John McDonnell, the shadow chancellor, has seized on this discontent. Last September, he vowed to bring PFI contracts “back in-house” under a Labour government. His threat is hanging over FTSE 250 investment funds, including HICL Infrastructure and International Public Partnerships.
In recent weeks there has been a measure of respite for investors. Last month a consortium tabled a £1.45 billion takeover offer for John Laing Infrastructure Fund, which backs mature PFI and public private partnership schemes. Despite the misgivings of some shareholders, the board recommended the bid of 142½p a share, pitched at a relatively modest 17 per cent premium to net asset value.
Some City analysts believe that the opportunistic bid won’t be the last in the sector and see benefits to reducing the number of players in the field. “It is not clear why several management teams are required to run portfolios of these assets, when one could surely do the job just as well, taking out cost in the process,” Russ Mould, an investment director at AJ Bell, the broker, said.
The bulls say that infrastructure funds offer attractive dividend yields, providing a steady income stream at a time of low interest rates. HICL, a £2.9 billion quoted fund, yields 5.1 per cent and is trading at a mere 7 per cent premium to the value of its asset base. That looks a snip.
Yet political risks abound, certainly compared with the days when the PFI vogue was at its peak under new Labour. The PFI bet was assumed then to be virtually risk-free. Labour has U-turned since and, thanks to the government’s shambolic handling of Brexit, is now neck-and-neck with the Tories in the polls. Mr Corbyn is close enough to power to dampen any euphoria that the John Laing bid may have inspired.
“We don’t see the prospect of bids for JLIF’s social infrastructure fund peers, given a degree of opportunism in the possible bid,” Jefferies, the broker, said in a recent research note.
Mr Corbyn’s rise has pushed Theresa May on to the back foot. She is sensitive to perceptions that PFI projects are subsidising the private sector, particularly when it comes to building schools and hospitals. After the demise of Carillion, the construction group that collapsed in January, Mr Corbyn urged her to end “jackpot time for the privateers”.
At the same time, the financial rationale of PFI has come under increasing scrutiny. In January, a National Audit Office report declared that long-term contracts to construct and operate hospitals, schools and other projects were costing billions a year, with no discernible benefit to taxpayers. Future charges for existing PFI deals would amount to £199 billion by the 2040s, according to the NAO.
Talk of a windfall tax is also in the air. Stella Creasy, the Labour MP, tried to force through an amendment to the Finance Bill in February to impose a new tax on PFI contractors, losing by a relatively narrow margin.
If the political backdrop is becoming harder to predict, so, too, are the wiles of central bankers. Investors buy infrastructure funds for their predictable dividends. As interest rates rise and bond yields rise, that would make them far less attractive to income investors. Thus, with political and interest rate risks escalating, it’s time to take profits on infrastructure funds.
ADVICE Sell
WHY Infrastructure funds may look attractive, but political risks are rising
SDL
The translation software developer suffers from the curse that has afflicted far too many British technology companies (Simon Duke writes). SDL has developed a product that is considered to be one of the best in its field, but has never quite managed to convert its technical prowess into blistering profits.
Adolfo Hernández, who joined as chief executive two years ago, is on a mission to ensure that SDL lives up to its potential. He’s in the midst of an overhaul that looks like it is starting to bear fruit.
Established in 1992, SDL was listed during the dotcom boom of the late 1990s and grew through a series of acquisitions. It has been held back by discord in the boardroom and some strategic missteps. Mr Hernández, a seasoned software executive, arrived in 2016.
After selling several peripheral businesses, he has taken SDL back to its roots as a software and services provider, principally helping large companies to translate manuals, marketing material and other texts into a multiplicity of languages. Many of its 4,000-strong workforce are translators, but SDL uses machine learning to sharpen its software, so that more of the time-consuming process can be automated.
Despite the threat to the trade system from President Trump’s tariff war, globalisation puts a fair wind at SDL’s back. In Mr Hernández’s words: “As multinationals expand into new territories, they need more language support.”
The recent $78 million takeover of Donnelley Language Services boosts its presence in financial services and life sciences, industries where companies cannot afford for documentation to get lost in translation.
In the six months to the end of June, revenues rose 3 per cent to £143 million, with profits from continuing operations rising from £6 million to £7.8 million. SDL shares closed down 6p at 500p, valuing the company at £451 million.
Peel Hunt, which has a 570p target on the shares, said that the “wheels are in motion for its transformational plans, but there is more to do”. With the broker forecasting annual profits of £3 million next year, SDL is attractively priced, provided that Mr Hernández can deliver.
ADVICE Buy
WHY The turnaround plan is beginning to bear fruit
