Greencoat UK Wind (UKW) has seen continued acquisitions and capital raises throughout 2020, despite the pandemic. The trust remains the largest listed renewable energy infrastructure fund, with gross assets of £3.3bn once the latest acqusition completes. It provides a pure investment exposure to UK wind farms, with the twin aims of delivering a high, RPI-linked income return for shareholders whilst maintaining capital value in real terms.
UKW is achieving its managers’ ambitions in becoming ‘utility scale’, which benefits shareholders in a number of ways (see Portfolio section). The overall costs of running the trust have continued to reduce, and scale also allows the managers to negotiate operational cost savings and implement other asset management initiatives. Lastly, the trust has the scale to purchase institutionally sized assets. This is increasingly important in what is now a popular market and asset class, and bodes well for the future.
At the current price, the dividend yield is 5.3%. As we discuss in the Dividend section, one of the distinguishing features of UKW relative to peers is that it aims to link the dividend with inflation, as measured by RPI. UKW is on track to pay the 2020 target dividend of 7.1p, representing compounded growth of 18.3% in total since listing and ahead of inflation.
UKW has historically traded at a significant premium to the peer group average. This was the case until relatively recently, with the share price not having recovered its poise yet, following the £400m equity issuance completed at the end of September. UKW now trades on a premium to NAV of 10.3%, relative to the weighted average for the peer group of 13.1%.
UKW’s performance over the year to date highlights its attractions relative to peers and wider equity markets. In terms of dividend, the trust retains its commitment to link dividend increases with RPI. In our view, this is largely down to UKW’s model which budgets for dividend cover of 1.7x in a ‘normal’ year. Last year, low wind conditions and moderate electricity prices meant that dividend cover was ‘only’ 1.4x, significantly higher than most solar funds. We estimate that dividend cover will remain broadly the same at c. 1.3x this year, based on an assumption that wind resource will be in line with average years, but factoring in significant falls in wholesale electricity prices relative to last year.
Over the long run, we would hope for more of a surplus which UKW can reinvest to maintain the value of the NAV in real terms. In the interim, investors will be reassured that their dividend remains on track. UKW is in a strong position to continue to grow, which further embeds its competitive position within the sector – with a lower OCF expected next year and its size enabling attractive asset acquisitions.
The extraordinary year that 2020 has been shows UKW offers valuable income and diversification properties to investors. Despite employing modest gearing to achieve its objectives, which clearly presents some risks, the trust has shown it is highly resilient. With more investors looking for sustainable investments, we think that UKW’s lower premium to peers might prove an attractive entry point on a relative basis.
|High dividend yield, well covered by cash||Premium to NAV (although currently below peer group average)|
|Continued commitment to RPI-linked dividend growth||Gearing always exacerbates underlying asset valuation movements|
|Uncorrelated assets||Valuations based on long-term assumptions which may (or may not) prove optimistic|