TRIG - Renewables Infrastructure Group 19 December 2023
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) has suffered quite a derating over what is rather a short period of time. As we illustrate in the Discount section, having traded consistently at a premium to NAV north of 10% only 18 months ago, the shares now trade at a discount to NAV of 16%, a swing of nearly 30%. Stepping back—what can we make of this significant change? Is this one of those relatively rare moments when there is genuine, tangible value on offer?
Interest rates have risen dramatically over the last 18 months, meaning that TRIG’s dividend yield is less attractive on a relative basis. The current dividend yield of 6.6% offers a slimmer 2% premium over savings rates than historically. However, as we illustrate in the Portfolio section, those who dashed for cash when interest rates started rising, have actually seen significant losses on their capital in real terms. By contrast, with 62% of TRIG’s 12-month revenues directly linked to inflation, its cashflows should provide strong inflation protection.
As of 30/09/2023, if market-implied inflation expectations were to be reflected in TRIG's UK inflation assumptions, portfolio-wide return expectations would increase by c. 0.6% per annum. This means that TRIG’s future returns can be thought of as not only a high nominal income stream, but also one that is real, and that will grow over time with inflation.
In absolute terms, TRIG’s prospective total returns are significantly more attractive than they were 18 months ago and now stand in line with long-term total returns from equities. Taking the weighted average discount rate of 8.1%, deducting ongoing charges of c 0.95% per annum (see Charges), investors have prospective NAV total returns of c. 7.1% per annum.
In our view, despite the share price derating, nothing has changed in terms of the ability of TRIG to continue to deliver attractive returns to shareholders. The combination of a high degree of fixed revenues, strong inflation correlation, and power price forecasts that are partly insulated from further falls (thanks to windfall taxes), serves to reduce the risks arising from a volatile macro-outlook.
As we have seen so far, the interplay between inflation and interest rates provides something of an inherent hedge. Whilst TRIG has been a beneficiary of higher inflation, it has conservative future inflation assumptions underpinning the NAV. Any significant fall in inflation is likely to be counterbalanced with interest rates falling too, with a resulting impact on the portfolio discount rate.
The increases in the discount rate that we have seen over the past 18 months have raised the expected net IRR of TRIG’s portfolio, which at 7.1% per annum is attractive in the context of historic long-term equity returns. Given the diversified portfolio which minimises specific risks and the current discount to NAV, long-term investors may decide that the market is overly pessimistic about TRIG’s prospects.
In the immediate term, given the forecast dividend cover of 1.6x for the current financial year, the trust is in the strong position of having surplus cash to deploy. However, in the immediate term, as we discuss in the Gearing section, it would appear prudent to prioritise paying down relatively expensive floating rate debt, before considering share buybacks or raising the dividend further.
- A high yield of 6.6%, 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 has been positive, building on the historical stability of TRIG’s cash flows
- TRIG is likely to use surplus capital to repay debt, rather than buy shares back
- Discount to NAV may persist for some time
- Dividend cover not as high as that of funds which are not amortising, i.e. paying down debt