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Renewables trusts: are 6% yields too strong to ignore?
Renewables infrastructure trusts boast stronger yields than their more mainstream peers, and James Carthew spots an opportunity.
It is a while since I had a look at the renewable infrastructure sub-sector and it seems to have been going through a more difficult time in recent months, so I thought this might be a good time to take another look.
Infrastructure funds are still very much in favour with investors – the usual suspects, such as HICL Infrastructure (HICL ) and BBGI (BBGI ), trade at an average premium of 12% and an average yield of 4.9%. Those numbers are dragged down by International Public Partnerships (INPP ), which is in the throes of trying to raise an additional £460 million of equity capital.
By contrast, the renewable infrastructure funds trade at an average premium of 3.2% and an average yield of 6%. In a lot of ways though these two types of fund are quite similar – for example, the revenues of the projects they invest in are largely backed by governments or quasi-government bodies, the assets generally have long lives and as much as possible of the nitty-gritty of managing the assets is outsourced.
The discrepancy in yield and rating therefore looks odd to me.
The obvious cloud hanging over the renewable infrastructure sub-sector is the inconsistency of the UK government’s policy towards subsidies for the renewable energy sector. It is fair to say both the onshore wind and solar sectors expanded far faster than the government predicted and that expansion was set to continue (albeit that the major investors were already factoring planned subsidy reductions into their thinking).
In the summer, the government announced the end of the climate change levy exemption for renewable energy generation, plans to change the renewables obligations and feed-in-tariff support schemes for solar schemes of less than five megawatts (in the interests of reducing energy bills, which seems at odds with the vast subsidies they have just signed up to for nuclear power),
The government also announced it would close the renewables obligation scheme for onshore wind a year early, along with changes to the planning system to make it harder for new wind farms to be approved.
Regardless of whether you feel the government needs to rein in the renewable energy industry or not, to make sudden savage changes to the subsidy regime in this manner is extremely unhelpful.
Swathes of companies operating in the industry are closing or laying off staff. One of those hardest hit was Renewable Energy Generation (WINDR), whose share price dived after it announced it would take a charge against the value of onshore wind sites that it now feared would not get developed and was forced to cut its workforce.
It still has a portfolio of completed wind projects, some that would still get developed, which when built out would make it resemble Greencoat UK Wind (UKW ), and a business recycling cooking oil.
By my reckoning this was worth about 80p so I took advantage of the price fall to pick some up close to 40p. The management team then announced a 60p bid for the company – I would prefer it did not succeed at this level but the shares are still trading in the low 50s.
Greencoat reported a small hit to net asset value after the announcements but thinks it has plenty of opportunity to add to its portfolio in the secondary market – buying onshore wind farms that are up and running and enjoying the old levels of subsidy.
Renewables Infrastructure Group’s (TRIG ) statement on the subject suggests that its new investment focus for the next few years will switch to Northern Europe.
TRIG already invests in France and Ireland. Longer-term it sees the chance of more investment in the UK but not until new wind and solar projects can be profitable without subsidy (incorporating innovations that will presumably now be developed outside the UK).
Given the potential opportunity in the European renewables market, it was perhaps surprising the two European solar funds that tried to launch this summer did not make it. Maybe the problem was that two funds tried to launch at the same time and were due to close in quite nervous markets. I still think there is room for at least one fund in this area – maybe one of them will come back and try again.
The funds focused on the solar market all took a hit when the climate change levy changes were announced but they are soldiering on. The impact on their existing portfolios was offset by reductions in corporation tax rates that were announced in the Budget.
The focus for most of these companies seems to be on acquiring assets in the secondary market and projects that got in under the wire before the subsidy changes took effect. They all seem to agree that the size of this opportunity is considerable. It is hard to see how long lived it might be.
NextEnergy Solar (NESF ) maxed out its borrowing over the summer, picking up plants capable of generating 44 megawatts an hour at peak levels and said it was in negotiations over assets worth £335 million. It asked investors for more cash in September and collected £38.8 million, which I suspect was less than it was hoping for, but still a sign that investors have not given up on the sector.
Foresight Solar (FSFL ) too says it has a large pipeline of potential opportunities. It has room to issue shares via a tap issue if there is demand. Bluefield Solar Income (BSIF ) says there is still an attractive opportunity in rooftop solar installations in the UK.
John Laing Environmental Assets' (JLEN ) stance in August was that the subsidy changes would have no impact on its existing portfolio or immediate pipeline.
Generally, it looks as though there is some indigestion in the renewable energy sub-sector at the moment as investors, unnerved by the UK government’s actions, are concerned about meeting the immediate demand for capital that these funds have.
Barring a more drastic and retroactive change to subsidies though, these businesses do look attractive at the moment and I would expect the ratings of the renewable infrastructure and infrastructure sub-sector to converge over time.
James Carthew is a director at Marten & Co. The views expressed in this article are his and do not constitute investment advice.
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- HICL Infrastructure Company (Ordinary Share)
- BBGI SICAV (Ordinary Share)
- Greencoat UK Wind (Ordinary Share)
- NextEnergy Solar (Ordinary Share)
- Foresight Solar (Ordinary Share)
- Bluefield Solar Income Fund (Ordinary Share)
- John Laing Environmental Asset (Ordinary Share)
- International Public (Ordinary Share)
- Renewables Infrastructure Grp (Ordinary Share)
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by Gavin Lumsden on Jul 22, 2016 at 16:24