TRIG - Renewables Infrastructure Group 20 December 2022
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) might be considered the bellwether for the renewable energy infrastructure peer group, having a portfolio of assets worth c. £3.7bn and offering exposure across different types of renewable energy technology located in the UK and Europe. TRIG has recently reported its 30/09/2022 NAV, adjusted for the UK government’s subsequently-announced windfall tax on electricity revenues. Previously, the tax has been a source of uncertainty. With the updated NAV having been published, the share price has remained flat and, as a result, TRIG’s shares trade on a c. 4.5% discount.
TRIG’s discount rate, effectively the gross expected return from the portfolio, has been moved up to 7.1%, as at 30/09/2022. This compares to 20-year UK gilt yields at c. 3.75%, as at 14/12/2022, implying an equity risk premium of c. 3.4%. The shares yield 5.3%. Both of these statistics illustrate the attractions of TRIG’s shares for long-term investors on a risk-adjusted basis.
The UK’s windfall tax, i.e. the Electricity Generator Levy, has negatively impacted expected income, but only for the 2023 and 2024 calendar years; TRIG’s expectations for UK power prices post 2026 are below the £75/MWh level. We note that TRIG’s sensitivity to changes in the expected level of power prices down to £75/MWh over the next couple of years is now significantly reduced as a consequence of the Electricity Generator Levy. As such, from the perspective of power price exposure, TRIG might be seen as having been somewhat de-risked as a result of the levy.
Whilst the long-term trajectory of TRIG’s NAV has, historically, been relatively stable (see Performance section), as we all know past performance is not necessarily a guide to the future. There are many inputs that influence TRIG’s NAV, but rarely have such big changes to assumptions been required over such a short period of time. As we highlighted in a recent note, TRIG is subject to the influence of three key variables on its NAV and returns: power prices, inflation and discount rates. Since then, and as we discuss in the Portfolio section, the windfall tax has negatively affected the NAV, as have rising discount rates. However, the effect has been offset by the positive effect of inflation and higher short-term power prices.
Long-term interest rates seem to have stabilised and, as we note above, TRIG’s sensitivity to short-term power price movements has now, arguably, reduced. As such, inflation looks to be the most important influence on returns over the short term. As at 30/06/2022, over the next ten years 51% of TRIG’s revenues are directly linked to inflation. Inflation has been consistently higher than central banks have forecast and, given TRIG’s sharply-reduced inflation expectations for 2023, we think there is clearly potential for further NAV increases if the current high inflation environment proves persistent.
The next scheduled NAV date for TRIG will be 31/12/2022, published in mid-February 2023. As we discuss in the Discount section, the share price has fallen over the short term. Historically, TRIG has traded on a consistent premium to NAV, so the 4.5% discount to NAV may be a potential opportunity for long-term investors. In our view, the diversification and quality of cash flows underpinning the income component of TRIG’s returns continue to make it a useful complement to equity portfolios.
- A high yield of 5.4%, with the potential for NAV growth from reinvestment of surplus cash
- Has a pure exposure to diversified assets, technologies and subsidy regimes which are uncorrelated to equity markets, and scores well on ESG matters
- Inflation-link likely to be a positive, counterbalancing any further rise in discount rates
- Long-term government bonds no longer looking unattractive for investors
- Hard to rule out further government intervention in energy markets
- Dividend cover not as high as that of funds which are not amortising, i.e. paying down debt