TRIG - Renewables Infrastructure Group 19 July 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.
Renewables Infrastructure Group (LON:TRIG), along with its peers, has suffered a significant derating at a time when interest rates have risen around the world, a result of central banks’ fighting against rising inflation. On the surface, TRIG’s relative attractions may have diminished in the eyes of some investors, as a result. However, we believe that investors who take this view may be missing several important points.
Firstly, it is short-term interest rate expectations that have risen the most dramatically, yet TRIG promises an attractive and secure income long into the future, with the potential for capital growth. With a portfolio weighted-average subsidy life remaining of c. 11 years, as well as some fixed price contracts for electricity generation, over the next ten years, 63% of expected revenues will not vary with electricity prices. On a ten-year basis, gilt yields have risen by 56bps over the first six months of 2023. TRIG’s current discount rate, therefore, offers a reasonable pick-up compared to conventional gilts (7.2% vs 4.3%).
Secondly, the majority of TRIG’s revenues have strong inflation protection, meaning TRIG’s revenue stream can be thought as not just a nominal income stream, but real. The managers of TRIG still have relatively conservative assumptions about inflation. Bank of England data implies that gilt-market RPI inflation expectations are well ahead those of TRIG, with c. 3.5% expected over the next 15 years. In our view, this suggests there is inherent conservatism built into the NAV. As we discuss in the Portfolio section, these conservative inflation assumptions may mitigate a potential rise in the TRIG portfolio discount rate.
Despite the share price derating, we can see nothing that has changed in terms of the ability of TRIG to continue to deliver attractive returns to shareholders. The combination of a diversified portfolio, a high degree of fixed revenues with strong inflation correlation, and power price forecasts that are partly insulated from further falls, serves to reduce the risks arising from a volatile macro outlook.
TRIG’s current share price translates into a prospective dividend yield of 6.2%. As we discuss in the Dividend section, the future path of dividend increases will reflect what the board sees as the correct balance between paying a sustainable dividend for the long term and reinvesting surplus cash flows, with the desire to provide an ever more progressive dividend. Either way, inflation will directly enhance total returns, either in the form of a higher dividend or through reinvestment and, therefore, capital growth.
Whilst there is clearly an argument for the discount rate to rise from the 7.2% level reported, as at 31/12/2022, the counterbalancing conservatism in TRIG’s inflation assumptions should provide some mitigation to downward movements in the NAV. At the same time, any increase in the discount rate effectively raises the expected gross IRR of TRIG’s portfolio, further illustrating to potential investors TRIG’s attractive risk-adjusted return potential. In this scenario, the current Discount to NAV of 14% may prove an attractive entry point.
- A high yield of 6.2%, 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, building on the historical stability of TRIG’s cash flows
- TRIG is currently relatively constrained in terms of being able to build out its portfolio further, given the discount to NAV at which the shares trade
- 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