TRIG - Renewables Infrastructure Group 09 October 2019
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by TRIG - Renewables Infrastructure Group. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
The Renewables Infrastructure Group (TRIG) is a one-stop shop for the burgeoning renewable energy sector. It differentiates itself from the other funds in the sector by being a non-specialist fund (wind, solar and battery storage so far) but with a remit to invest across the UK and in European countries where the directors and managers believe there is a stable renewable energy framework. Recently TRIG has announced a further extension of this policy, and the board is seeking shareholder approval to increase the proportion of assets the company can invest in Europe from 50% to 65%.
TRIG invests in assets which offer attractive long-term cash flows, elements of which are linked to inflation. The aim of the company is to provide long-term, stable dividends for shareholders, with any surplus cash flows after debt amortisation being re-invested to help maintain the capital value of the investment portfolio. The current portfolio, when fully built out in 2020, will be represented by 71 projects, with net capacity of 1.5GW. This is equivalent to 1 million UK homes or 1% of the total electricity generated in the UK.
Wind is currently the largest component of the portfolio (86% by value). However in the company’s recent announcement the managers state that to further diversify the portfolio they are considering investing in unsubsidised solar plants in Iberia, taking advantage of steeply declining capital costs and high solar resource. Solar provides a natural complement to wind technologies, given its peak electricity generation is during the summer months, while for wind peak generation occurs in the winter.
The push to invest overseas has gathered pace over the last couple of years, and during the 2018 calendar year 77% of new investments by value were made outside the UK. For the six months to end-June 2019, the company has invested in five projects, all of which are overseas (in Sweden, France and Germany). In total, 45% of the portfolio is currently invested outside the UK, up from 28% at the end of 2018.
TRIG has a progressive dividend policy. The company’s dividend has increased each year since launch, at an average compound annual rate of 1.8% pa. Every year the board sets a dividend target for the following year, payable in four equal instalments. The current dividend target is 6.64p per share, equivalent to a yield of 5.1% at the current price and representing an increase of 2.2% from 2018.
The company has delivered strong and consistent returns since inception. Over the past five years, it has outperformed the FTSE All Share index on a NAV total return basis, but with lower volatility. Since its initial public offering (IPO) in 2013 the company has delivered total shareholder returns of 10.4% per annum (to 30 June 2019).
TRIG currently has long-term gearing of approximately 36% of portfolio enterprise value, all of which is all held at the project level. This is at the low end of the peer group. The longer-term debt is amortised over the life of each asset’s specific subsidy regime, which de-risks these assets over time (unsubsidised assets are not geared).
The company continues to enjoy robust demand for its shares. Currently the share price premium over NAV is around 14%, a slight premium to the sector average premium of 12.7% (Source: Numis).
TRIG continues to offer a sensible one-stop shop for investors wanting a broad exposure to the attractive cashflows that renewable energy projects currently offer. The pairing of two specialist managers has worked well and adds depth to the company’s management resources and skill set.
The company is clearly seeing opportunities for investment overseas, given the activity so far this year and the announcement that the board wishes to increase the proportion of assets that can be invested in Europe, to a maximum of 65%. This strategy will clearly increase diversification – certainly for investors holding any of the other London-listed renewable energy funds, which tend to have a more local focus.
As we observed recently, investors are increasingly considering a portfolio’s environmental, social and governance (ESG) credentials, and seeking to boost their exposure to funds which exhibit those elements. In our view, TRIG is likely to appeal to these sorts of investors, given its assets contribute towards lowering emissions by over 1m tonnes of CO2 per year. The managers also consider the ‘S’ and ‘G’ aspects of ESG as part of their investment and operations processes. The company Chair Helen Mahy has commented that the board wants investors to know that the company is “run by people who prioritise social responsibility”. It seems fair to assume that the managers are regularly challenged and encouraged by the board to achieve their ESG goals.
For any investor, however, the company’s fundamental attractions remain. Its portfolio diversification serves to reduce volatility for shareholders both in income and NAV. Meanwhile the current premium rating (in absolute terms as well as relative to peers) possibly reflects the company's institutional scale, as well as its high-quality assets and its attractive and diversified income profile.
|High yield of 5.6%, with potential for NAV preservation from reinvestment of surplus cash
|High premium to NAV in absolute terms
|Diversified exposure to assets, technologies and subsidy regimes which are uncorrelated to equity markets
|Exposure to UK political risk but in an industry that has political and popular support
|Debt being repaid within the subsidy period (amortising)
|Valuations based on long-term assumptions which may prove optimistic