Greencoat UK Wind 06 November 2024

UKW is the fifth largest owner of wind farms in the UK and is in a strong and unique position to help the UK’s transition to a low-carbon economy through its simple business model. By investing in wind farms, UKW aims to provide a comfortably covered dividend (see Dividend section). Each year it should be in a position to reinvest surplus cash flows to grow NAV; the managers see their role as stewards of shareholders’ capital, determining the most accretive use of these surplus cash flows.

As we discuss in the Portfolio section, the recent Q3 NAV announcement offers an insight into how the board and manager are thinking about capital deployment. With the discount relatively wide, cash was used to progress the previously announced buyback programme. As the discount narrowed, the relative attractions of an incremental investment in the Kype Muir Extension wind farm came to the fore. We understand that the investment opportunity came through the exercise of UKW’s shareholder rights in the project, and was on highly attractive terms. The worth of this transaction is shown in the NAV accretion from the £14.25m deal, which exceeded the accretion from the £16.8m worth of buybacks also made over the quarter. In our view, this shows the benefit of UKW’s cash generative model, which gives the trust flexibility to take advantage of opportunities.

The recent NAV announcement also included news that UKW’s shorter-term debt has been successfully refinanced (see Gearing section), and UKW has no further need to repay any debt for a further two years. The overall weighted average interest rate has risen by an immaterial amount (4.68% as at 30/09/2024 vs 4.63% as at 30/06/2024). We understand that the board sees the current level of long-term gearing as attractive and sustainable, though it has been noted that proceeds from any disposals would likely be used to reduce gearing.

The recent NAV announcement provided some interesting information on the board and managers’ thoughts in the current environment. We discuss the specifics in the Portfolio and Gearing sections, but with UKW trading on a discount to NAV, and further equity raises therefore off the table, the team are optimising returns for shareholders on a dynamic basis. Key to their ability to do this effectively is UKW’s impressive surplus cash flows, over and above that required to pay and increase the dividend in line with inflation. As at 30/06/2024, UKW has paid £1,074m in dividends and generated (and reinvested) £935m of excess cash flow.

The attractive terms achieved in the recent refinancing show that borrowing even in the current environment is not blunting shareholder returns, with the weighted average interest rate effectively unchanged. In terms of outlook, UKW seems well positioned to continue to deliver strong total returns to shareholders (see Performance section), with the majority of returns coming in the form of an attractive dividend that yields well in excess of government bonds.

As we have discussed, that UKW currently trades at a discount has not impacted the manager’s ability to allocate capital and generate NAV accretion, as the most recent quarter illustrates. With the dividend yielding 7.5%, UKW’s shares are an interesting proposition for investors wishing to take advantage of the potential for rates to fall. Should the ten-year yield fall back once again, UKW may benefit from the discount narrowing, providing outsized returns to shareholders who bought shares at a wider discount to NAV.