Greencoat UK Wind (UKW)’s managers continue to build a formidable portfolio of wind farms in the UK. Whilst the market for wind farms in the UK is currently competitive, the team have been able to raise and deploy significant amounts of capital during the last financial year – all at rates of return that we think should enable the trust to meet its total return objective of 8-9% net of fees.
Increased size brings efficiencies in many ways. As we discuss in Charges, the OCF is now sub 1% per annum. Size also allows operational efficiencies, but perhaps most importantly allows the trust to buy much larger assets. UKW’s increased scale allows it to invest in the burgeoning market for offshore wind farms more effectively, which currently represents 30% of the portfolio.
UKW has twin aims of delivering a high, RPI-linked income return for shareholders whilst maintaining capital value in real terms. 2020 has shown the strength and resilience of UKW’s relatively simple model, with the trust generating a covered dividend and continuing to state its ambition to grow the dividend in line with inflation. At the current price, we estimate that the prospective yield is 5.5%. Excluding income, the NAV has grown from launch at 98p to 120.4p, growth of 22.9% which compares with RPI growth of 18.8%.
UKW has historically traded at a significant premium to the peer group average. UKW now trades on a premium to NAV of 7.4%, below the five-year average for the trust and relative to the weighted average for the peer group of c. 10%.
2020 has shown UKW’s resilience. Despite employing modest gearing to achieve its objectives, which clearly presents some risks, the trust has handled the unique circumstances the year has brought and continued to pay a covered dividend. Significant falls to wholesale electricity prices meant that dividend cover was 1.3x, compared to the manager’s typical budget of 1.7x in a ‘normal’ year. The managers have restated their ambition to continue to pay a dividend rising with inflation.
UKW’s income stream is in our view attractive in comparison to other sources, both in terms of its extent (yield of 5.5% at the current share price) but also because UKW so clearly fits within a sustainability theme. In buying wind farms, UKW is contributing to the UK’s efforts to achieve ‘net zero’ by enabling developers to recycle capital into new projects.
Looking back over past years, UKW’s shares have offered valuable diversification properties to investors. The shares have demonstrated low beta, and significantly lower share price drawdown than the FTSE All Share, which has helped the shares have a volatility significantly less than the broader equity market. At the same time, they have outperformed the wider market by quite a margin since IPO in 2013.
The covered dividend and link with inflation, as well as the OCF now being below 1%, means that UKW has a strong entrenched position in the sector. UKW’s lower premium to NAV than the peer group average 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
||Valuations based on long-term assumptions which may (or may not) prove optimistic