Greencoat UK Wind (UKW) was the first renewable energy infrastructure trust to launch, and its subsequent growth has led to significant benefits for investors. The tiered fee structure and economies of scale have led to the OCF reducing significantly over time. At the same time, the trust can now consider much larger sized investments, which in themselves offer economies of scale and therefore potentially higher returns than might otherwise be the case. Finally, its scale enables a dedicated management team to optimise the assets and enhance performance.
This shows up in the NAV performance of UKW, which continues to perform strongly relative to peers and the UK equity market. UKW remains the only renewable energy infrastructure fund to explicitly state that its aim is to grow dividends in line with inflation.
The UK Government’s ten-point plan for a Green Industrial Revolution to achieve carbon neutrality by 2050 requires a significant ramp up of offshore wind generation to 40GW, which would represent a quadrupling of current capacity. Offshore wind farms are typically significantly larger than onshore, and UKW’s increased scale will allow it to invest in this asset class. Notwithstanding a competitive market, UKW has a significant pipeline of assets that it has committed to buy which should give reassurance on the immediate future in terms of capital deployment.
UKW’s target dividend for the current year is 7.18p, meaning the shares offer a prospective dividend yield of 5.4% on the current share price, which we think compares well with income sources elsewhere.
In our view 2020 shows the strength and resilience of UKW’s relatively simple model. A combination of the high and rising dividend, and the NAV growth has led to strong total returns since IPO and over the past five years. Indeed, UKW remains amongst the best performing of the renewable energy infrastructure funds since it launched in 2013.
At the same time, the NAV has been strong and uncorrelated with volatility in the equity market. The share price has had a beta and volatility of less than half of the FTSE All Share over five years (Source: Morningstar), and so we believe that over the long term UKW’s trading history illustrates that it is an attractive complement to equity portfolios.
Of late, dividend cover has been lower than the managers’ budgeted expectation of 1.6-1.7x. For the current year, it is early days yet. However, we understand that the team are optimistic that despite wind speeds being lower than usual in Q1 2021, higher wholesale energy prices mean that dividend cover should be in line with budget.
Notwithstanding a competitive market, UKW has a significant pipeline of assets that it has committed to buy which gives reassurance on the immediate future in terms of capital deployment. The current premium to NAV of 11% (Source: JPMorgan Cazenove) is in-line with the five-year average for the trust. In our view UKW justifies a premium rating to the peer group average, and so the current level could provide an attractive entry point for a trust offering a covered dividend linked to inflation, and an OCF projected to be below 1%.
|High dividend yield, well covered by cash
||Premium to NAV (although currently below peer group average)
|Continued commitment to RPI-linked dividend growth
||Gearing exacerbates underlying asset valuation movements
|Uncorrelated assets, and committed pipeline of investments
||Valuations based on long-term assumptions which may (or may not) prove optimistic