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Corn, oil and copper all make great inflation hedges, but with the risk of volatility from supply and demand shocks. Smart investors are tapping into a more reliable commodity to protect against rising prices: Joe Public. Index-linked contracts are a feature of the infrastructure that supports public services and transport. US buyout firm KKR hopes to bolster its inflation defences with an offer for John Laing Group. This values the UK infrastructure group at £2bn.
Governments deploy private investors to build, maintain and run everything from roads to hospitals. Privately owned, but paid for by taxpayers, these assets are in theory easy to value using long-term cash flows. The value of contracts rise in parallel with consumer price indices. Assets that were already attractive to cost-conscious private equity firms are becoming even more alluring as economies heat up.
Last year falling power prices meant writedowns of £144m on John Laing’s renewables investments. The group’s net asset value fell for the first time since its 2015 listing, dropping 8 per cent to 310p per share by the end of the year. Expectations for lower inflation contributed too, shaving an additional £33m from a NAV that stood at £1.5bn.
Backward-looking valuation metrics flatter KKR’s bid. The 403p offer is a penny above the share’s all-time high in April 2019. But the purported deal premium of 35 per cent to the most recent adjusted NAV of 299p falls to just 20 per cent on 2019’s closing NAV.Â
How fast might the NAV recover? Based on last year’s assumptions, a 1 percentage point increase in inflation would boost John Laing’s NAV by almost 10 per cent. A four percentage point jump in inflation, the same amount that US consumer prices rose in April, would push the NAV above KKR’s offer price, all else being equal.Â
The public can do little about the rising cost of basic services except engage in fruitless moaning. John Laing investors have greater latitude. They should ask KKR to lift the price it is offering.
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