GCP Infrastructure Investments 10 August 2023
Disclosure – Independent Investment Research
This is independent research issued by Kepler Partners LLP. The analyst who has prepared this research is not aware of Kepler Partners LLP having a relationship with the company covered in this research report and/or a conflict of interest which is likely to impair the objectivity of the research and this report should accordingly be viewed as independent.
To provide shareholders with regular, sustained, long-term dividend income and to preserve the capital value of its investments over the long term by generating exposure to infrastructure debt and/or similar assets.
GCP Infrastructure Investments
Gravis Capital Management
Rollo Wright; Stephen Ellis; Ben Perkins; Chloe Marlow; Dion Di Miceli; Phillip Kent; Saira Johnston; Matteo Quatraro; Beth Watkins
Association of Investment Companies (AIC) Sector
Dividend Distribution Frequency
Latest Market Capitalisation
Latest Net Gearing (Cum Fair)
Latest Ongoing Charge Ex Perf Fee
(Discount)/ Premium (Cum Fair)
Daily Closing Price
GCP Infrastructure Investments (LON:GCP) invests into UK infrastructure assets that have public sector-derived revenues, and largely invests only in debt. The primary objective is to pay an attractive level of dividend, and to protect capital through structuring investments and through diversification. In the context of the listed fund universe, GCP might be considered a hybrid due to its exposures to three main areas, comprising PFI/PPP projects, supported living and renewable energy. As a result, GCP has a more diversified portfolio than most.
The manager’s approach since the launch of the trust has been opportunistic, taking the view that the highest prospective risk-adjusted returns will be available to those prepared to invest in emerging asset classes. As we discuss in the Portfolio section, it is this approach that has resulted in the trust’s wide spread of renewable energy assets.
Since GCP was launched in 2010 it has successfully paid a consistent stream of dividends to shareholders. The Dividend for the last two financial years was 7p, and the target for the current year is the same. Although recently interest rates have risen, this follows a period of declining interest rates and increased competition for assets, such that the manager had to expose GCP to higher-risk projects to maintain the income. At the current share price GCP yields 9%, which, as we discuss under Dividend, is higher than that of most peers. It is worth noting that some of GCP’s income is ‘rolled up’ and accrued. As such, on a cash basis, GCP’s dividend is not covered.
GCP’s more fixed interest nature when compared to most of its peers, means that there’s a logic to its discount widening more than average in a rising interest rate environment. However, the Discount has widened to c. 30%, putting the dividend yield at over 9%, which puts GCP at the extreme end of discounts.
This seems to ignore the fact that the bulk of GCP’s Portfolio has a maturity of less than 10 years, and around a quarter of net assets are set to repay in the next three years. This leaves GCP in a position where it can choose to either reinvest at prevailing interest rates, potentially enhancing dividend cover, or at a 30% discount buy back its own shares. The team have recently reiterated that at the current discount, buy backs are likely to be at the top of the list as the most attractive use of cash, and a number of share buy backs have been executed recently.
Balancing that, GCP’s lending has historically sometimes involved riskier projects, and there is likely an element of this attached to the discount as well. But with significant amounts due to be repaid, there is a pathway to GCP’s discount recovering over the next few years.
- A 30% discount to net asset value
- Approximately a quarter of the portfolio is due to repay over the next three years
- Highly diversified across
- Dividend is not always covered by cash
- Although GCP is principally a debt provider, some of its projects are riskier than average for the peer group
- Leverage can amplify losses as well as gains