GCP Infrastructure Investments 12 July 2022
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.
GCP Infrastructure Investments (GCP) invests into UK infrastructure assets, which 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, with 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 wide spread of renewable energy assets, most latterly with a pioneering geothermal investment which will help the Eden Project in Cornwall significantly reduce carbon emissions.
Since GCP launched in 2010 it has successfully paid a consistent stream of dividends to shareholders. The dividend was reduced in the last financial year to 7p, down from the previous level of 7.6p. Since launch, interest rates have declined significantly and competition for assets has increased, such that the manager has inevitably had to expose GCP to higher risk projects to maintain the income. At the current share price, GCP yields 6.3%, which as we discuss in Dividend, is higher than most peers. It is worth noting that a significant proportion of GCP’s income is “rolled-up” and accrued. As such, on a cash basis, GCP’s dividend is not covered.
GCP has delivered a steady pattern of NAV total returns, reflecting the strategy which aims to generate a steady and attractive income from providing debt to infrastructure projects. Since launch, GCP has generated a NAV IRR of 9% per annum (to 31/03/2022), with the majority of the returns coming from income.
Over time interest rates have declined significantly and competition for assets has increased, such that the manager has inevitably had to expose GCP to modestly higher risk projects to maintain the income. We also observe in the Gearing section, that in order to maximise income, the manager has also increasingly deployed leverage. We don’t believe that this is necessarily anything to be concerned with but merely reflects the changing nature of the investment landscape.
Whilst GCP does provide a sensitivity analysis of the impact of various assumptions on discount rates, inflation and electricity prices, it is not in a way which enables comparisons with other Infrastructure or Renewable Energy infrastructure peers. However, in our view, given the disclosed sensitivities and the fact that GCP largely invests in debt, we expect that the overall sensitivity will be significantly less than these peers.
On a discount to NAV of 3.3%, GCP is relatively inexpensive when compared to the infrastructure peer group average premium of 2.5% and the renewable energy infrastructure average premium of 6.0% (Source: JPM Cazenove, as at 06/07/2022).
- Sizable, established portfolio
- High dividend
- Well diversified by types of asset, and by project
- Dividend not covered on a cash basis
- Gearing can exacerbate losses
- Limited disclosure (compared to other funds) on portfolio sensitivities