Last year, I was able to report a return to profitability for the Group after a difficult period of restructuring. I was also able to tell shareholders about the excellent progress made in our fast growing business of infrastructure development, investment and operations.
 I am pleased to report that 2004 saw a continuation of our strong performance and our focus on public service accommodation, roads and rail has proved to be a sound basis for significant growth.
During 2004 we were able to create new partnerships and pursue innovative solutions against a background of continuing Government commitment to investment in public services, and increasing appreciation that infrastructure investment is creating an asset class of significance for the future. At the same time the growing international interest in PFI/PPP is facilitating our entry into new markets.
Your Board remains committed to a strategy of delivering sustainable project earnings together with continuing growth in value of the infrastructure assets developed and managed by the Group.
RESULTS
The Group profit before tax for the year ended December 2004 was £25.1 million, compared to £21.2 million in the prior year.
The profit before tax attributable to the core continuing businesses increased by 43% to £23.4 million compared to £16.4 million in the prior year.*
This result reflects underlying growth in the profitability of the investments portfolio. It was achieved after allowing for increases in business development and asset management expenditure and costs relating to an expanded programme of bidding.
* Profit before tax from core investment businesses; excludes results of non-core businesses; retained businesses £1.6 million (2003 – £0.3 million) and discontinued businesses of £0.1 million (2003 – £4.5 million).
DIVIDENDS
Shareholder returns from the Group’s principal infrastructure development and operations businesses derive from capital as well as earnings growth, and the John Laing dividend policy now reflects this in accordance with our aim of establishing a platform for future growth.
For the year ended 31 December 2004 the Board is recommending a final dividend of 2.2 pence per Ordinary Share (2003 – 2.0 pence), bringing the total for the year to 3.3 pence per Ordinary Share (2003 – 3.0 pence). Subject to shareholder approval, the final dividend will be paid on 1 June 2005 to shareholders registered at the close of business on 1 April 2005.
PORTFOLIO REVIEW AND VALUATION
At the year end, our portfolio included 42 project interests of which 24 are fully operational and a further seven partially operational.
Operational projects continue to perform well, with the risk management strategies embedded in our approach to sourcing construction and ongoing service activities proving robust. The value of the portfolio remains heavily weighted towards less risky projects with availability based payment mechanisms. Our most significant exposure to volume risk relates to Chiltern Railways where, once again, both passenger revenues and profits grew ahead of expectations during 2004.
A valuation exercise has been conducted in line with the methodology which we have consistently applied since 2000 and the application of that methodology has been independently validated by Ernst & Young LLP. The results indicate a portfolio valuation of £301.2 million, an 18% growth over the December 2003 valuation after intervening transactions are taken into account.
ACQUISITIONS AND DISPOSALS
After several years in which Group restructuring saw a series of major disposals matched by acquisition of two significant PFI portfolios (from Hyder and Amey), 2004 was a year that focussed primarily on organic growth of our key project interests.
As an existing shareholder in the successful M40 road project, we acquired the remaining 50% interest from Carillion in June 2004 for £19.7 million. Following management action to optimise the project structure, we disposed of a 50% interest in the project for £26.3 million to the Secondary Market Infrastructure Fund in October 2004 resulting in a £6.4 million profit after costs. This transaction was a further demonstration of liquidity in a now competitive secondary market for project investments.
During the first half, Laing Rail realised £2.9 million profit from the disposal of its 50% interest -in a development site identified as a result of Chiltern Railway activity and assembled for housing by the Transcend joint venture with Kier Property.
JOINT VENTURES
More broadly, joint venture activity with our chosen partners in key sectors progressed strongly during the year.
In June 2004 we announced a ground breaking co-investment partnership with the Commonwealth Bank of Australia (‘CBA’). The John Laing-CBA joint venture is targeting project equity investment opportunities of up to £300 million in the UK Health and European Roads sectors over a three to five year period. Bidding activity is jointly supported and good progress has been made in the first half year with four projects currently at the preferred bidder stage. John Laing selected CBA as a partner after a highly competitive process, which demonstrated strong international interest in the UK infrastructure market. This joint venture gives us the ability to pursue a broader range of large project investments in alliance with a partner that has an enviable track record of innovation and performance over the long-term.
ExcellCare, our 50:50 joint venture with HBOS, is active in the market for primary care and other local health facilities and reached financial close on five local LIFT (‘Local Infrastructure Finance Trust’) schemes during the year. Regenter, our 50:50 joint venture with UK Pacific Investment Management Limited focussing on housing and regeneration initiatives, became active during the year with two schemes at preferred bidder stage.
Chiltern’s operational success and Laing Rail’s infrastructure expertise are well suited to further opportunities emerging in the UK rail sector following the Government’s Rail Review and Network Rail’s improving stewardship of the underlying system. Laing Rail Projects, focussed on delivering rail enhancements for third parties with the same efficiency achieved elsewhere through PFI, produced a breakeven performance in its first full year of trading. Together with chosen partners we are currently evaluating further operations and infrastructure opportunities in the UK market.
Strategic alliances are also central to John Laing’s approach to the growing PPP market in Europe, outside the UK. Our evaluation of these opportunities is based principally on the strength of the relevant Government authority’s commitment and covenant, the level of risk-adjusted returns likely to be available and the strength of our chosen partners. In this regard we were fortunate during 2004 to be developing bids in Europe with Skanska, Vinci, Bilfinger Berger and other high quality local partners.
RETAINED LIABILITIES
During 2004 considerable progress was made in finalising residual obligations relating to construction activities undertaken by former Laing Construction entities, closing out a number of historical disputes in relation to projects such as the Cardiff Millennium Stadium and the Second Severn River Crossing.
The one major outstanding legacy issue relating to Laing Construction, concerns its conduct of construction management activities at the Great Eastern Hotel during the period 1998 to 2000. As set out in a press release last month, these have been the subject of litigation heard in the Construction Court, defended at the direction of our insurers, and judgement in this matter has been handed down since the balance sheet date (see note 20). The Directors are satisfied that the remaining construction liability provision is sufficient to cover this judgement and all other unresolved construction issues. Provisions and reserves relating to such issues reduced from £44.4 million at the end of 2003 to £34.3 million at the current year end.
PENSION LIABILITIES
The Group retains responsibility for The John Laing Pension Fund, which is closed to new entrants and has approximately 50 contributory active members, but some 9,500 deferred members (now working elsewhere) and pensioners drawing pensions.
The Group adopted the FRS 17 accounting standard relating to retirement benefits in 2003, ahead of its mandatory implementation, which results in a net deficit of £135.0 million (2003 – £93.7 million) being recognised in the balance sheet. This number is highly sensitive to some critical assumptions, and the increase in the net deficit over the last year results from the combined impact of taking a more cautious view of future inflation and the reduction in the AA corporate bond yield.
It is Group strategy to manage reduction of this deficit over 20 years. This approach is well matched to the long run nature of the robust cash flows generated by John Laing’s project investment activity.
The Group has reached an agreement with the Trustees under which an enhanced contribution of £6 million is to be made in 2005 (2004 – £4 million).
FINANCING STRATEGY
PFI/PPP and related infrastructure investment is associated with long lead times followed by long running predictable returns. The Group’s funding requirements can therefore be predicted well ahead of the final commitment to investment and it is the Board’s strategy to ensure that the financial resources are in place to meet actual and likely investment commitments.
In December 2004, the Group successfully refinanced its main borrowing and letter of credit facilities on more favourable terms. It now has access to £145 million of committed facilities, £115 million of which extend to March 2010.
DIRECTORS & STAFF
As I foreshadowed at the half year, your Board was reinforced with four new appointments becoming effective on 1 September 2004. Tim Matthews and Michael Medlicott joined the Board as independent non-executive Directors and at the same time Derek Potts and Richard Weston, the Managing Directors of Laing Roads and Equion respectively, joined the Board as executive Directors. The reconstituted Board team can now draw on a wider range of skills and experience and evaluation of performance to date suggests that Board composition is now well aligned to the needs of an expanding John Laing.
Progressing value creation on behalf of shareholders is crucially dependant on the skills and dedication of staff. 2004 saw a continuation of both the challenges and the opportunities of recent years and, on behalf of the Board, I would like to pay tribute to the enthusiasm and commitment of the many staff contributing to improved performance across the business. If John Laing has established a leading position in a number of growing sectors, it is in no small measure due to the determination to succeed and focus on quality characterising the approach of so many staff.
PROSPECTS
The early months of 2005 have seen a continuation of successful bidding, with new preferred bidder positions including Leicester Hospital, together with pre-qualification and short-listing for future opportunities. In each of our key sectors the identified pipeline of future opportunities for asset creation and related servicing requirements either remains strong or is growing. After reaching financial close on 11 projects in 2004, we expect to close at least eight in 2005, including major investments in the health sector.
Favourable Government policies in many OECD countries are contributing to the continuing spread and growth of private financing and delivery of major assets required as part of public service provision, and within the UK better managed procurement programmes of considerable value are emerging. Government and audit authority concentration on value for money issues is to be welcomed and assists companies such as John Laing which are focussed on delivering sustainable long running returns from quality outcomes.
Opportunities in the primary market are growing and broader awareness of the investment dynamics relating to infrastructure and service concessions has progressed. This is partly due to the scale of PFI/PPP investments now committed and delivered, and the growing number of operational PFI/PPPs. Greater transparency on the part of market participants and the development of a liquid secondary market for PFI equity as well as debt have also assisted this process.
Our chosen markets are increasingly providing scope for further growth and we are well placed to take advantage of emerging opportunities. We approach these prospects determined to maintain our leading position established in recent years and to build further on our reputation for innovation and delivery.
W W Forrester
Chairman
21 March 2005 |
