TRIG - Renewables Infrastructure Group 13 April 2023

The Renewables Infrastructure Group (TRIG) last year delivered its strongest annual returns yet. That said, alternative asset trusts have derated and TRIG has not been insulated from this. TRIG is in a strong position relative to many peers, having a very significant portfolio valued at £3.7bn, diversified across different types of renewable energy technology located in the UK and in several countries in Europe. TRIG can be differentiated from its peers in many ways, as we illustrate in the Portfolio section. In contrast to many peers, TRIG has critical mass and a fully-invested portfolio, which has a track record of delivering strong and consistent total returns over nearly a decade.

TRIG’s ability to raise new equity capital is currently constrained by the discount to NAV at which the shares trade, but the managers have stated that current commitments, including the construction and development pipeline, will be covered by currently forecasted excess cash flows. In the Gearing section, we highlight that, even if cash flow forecasts come in lower than anticipated, TRIG’s revolving credit facility (RCF) has enough headroom to finance all outstanding commitments.

TRIG aims to deliver a substantial part of the returns it generates by means of a dividend, and was included in our 2023 list of top-rated trusts for alternative income. As we discuss in the Dividend section, perhaps stemming from the infrastructure background of InfraRed, TRIG’s emphasis has always been on managing risks in order to provide a steady sustainable income for the long term as well as the potential for capital growth. Currently, the board targets 7.18p, representing a yield of 5.7%, at the current share price. The NAV total return since IPO has been 9.1% p.a.

Historically trading at a premium, the renewable energy infrastructure sector has derated, and now trades at a discount. TRIG's discount currently stands at c. 7%.

It is perhaps ironic that TRIG’s premium to NAV, having given way to a discount, came during a year in which TRIG reported a record NAV total return of 18.9% and earnings per share up 115%, over the prior year. As we discuss in the Discount section, in our view, the current discount is related to a change in macro factors. Clearly, with interest rates rising around the world, other asset classes, such as corporate bonds, potentially look incrementally more interesting. However, in our view, this ignores the fact that a majority of TRIG’s cash flows are directly linked to inflation, and TRIG offers the potential for capital and income growth. Over the next ten years, 63% of TRIG’s forecast revenues are directly linked to inflation through subsidy support mechanisms, with the majority of remaining revenues indirectly linked to inflation due to the relationship between power prices and inflation indices, providing strong inflation protection.

Whilst the board of TRIG is constrained in its ability to raise equity, as we discuss in Gearing, there is plenty of headroom from the RCF. We would expect the managers to use any surplus cash flows to either invest in more construction-phase assets, further diversifying the portfolio’s underlying cash flows, which will improve TRIG’s resilience and extend the duration of its income, or to buy shares back if the discount warrants it.

TRIG remains in a strong position to deliver attractive risk-adjusted returns. The valuation discount rate has been increased by 50bps to 7.2% on a weighted-average basis across the portfolio, which remains attractive in our view, despite rises in short-term interest rates. For us, it is important to remember that TRIG’s managers aim to manage risks to deliver a sustainable, long-term return stream, which has historically resulted in a NAV with relatively low volatility. Whilst it is perhaps hard to see an immediate catalyst that will see TRIG return to its historical premium to NAV of 10%, we believe it deserves to trade at a premium to peers, given its significantly higher-quality attributes.