TRIG - Renewables Infrastructure Group 24 May 2024

The Renewables Infrastructure Group (TRIG) is one of the ‘haves’ in the renewable energy infrastructure universe, with mature assets generating significant cash alongside a decent development pipeline. It has scale, which has allowed it to assemble a high quality, institutional portfolio. This puts it in a good position relative to smaller, more nascent peers.

Whilst the board is prioritising the repayment of more expensive short-term borrowings with surplus cash and capital, the portfolio is not standing still by any means. Wind and solar assets continue to make up the bulk of the portfolio by value, but batteries (or ‘flexible capacity’) now increasingly feature. We discuss TRIG’s recent acquisition of Fig Power, a specialist developer of battery assets in the UK, in more detail in the Portfolio section. Portfolio diversification leads to significantly smoother cash flows from which to pay the Dividend than might otherwise be the case.

TRIG’s approach to borrowings insulates shareholders from changes in interest rates, and given each project is also paying down debt every year, in time reduced asset level gearing will allow the managers to regear, meaning TRIG will have cash to reinvest and further build the portfolio. Elsewhere in the portfolio, the managers have been selectively selling assets, which enables TRIG to pay down the more expensive floating-rate debt, but at the same time enhance the overall portfolio construction and performance.

One significant initiative the team are working on is enhancing the ability of existing wind farms to generate power through retrofitting enhancements to wind turbine blades. RES’s trials at two of TRIG’s sites demonstrated an energy yield uplift of up to 5%, which has now been fully deployed at one site. The team are progressing well with a phased installation on four more sites, and an appraisal of a further three sites is underway.

TRIG’s manager, InfraRed Capital Partners, has a background in traditional infrastructure, which in our view has had an important influence on how the portfolio has been assembled. TRIG’s managers aim to minimise risks across the portfolio, by spreading investments across six European countries (including the UK). This means that revenues are diversified across different political regimes and across weather systems.

In absolute terms, TRIG’s prospective total returns are attractive, in line with long-term total returns from equities. Taking the weighted average discount rate of 8.1%, deducting ongoing charges of c. 1% per annum (see Charges) to get a simple estimate of NAV total returns going forward, investors stand to achieve NAV total returns of c. 7.1% per annum on a simplistic basis. As we have discussed in the Portfolio section, these returns should correlate with inflation , meaning that a good proportion of these returns can be considered real. The risks investors are taking to achieve these returns are minimised through diversification, and currently there is a potential for tailwinds to these returns from interest rates falling, with valuations already having taken the hit from inflation falling.

Sentiment towards TRIG and the renewable energy infrastructure peer group has waned, leading to a disconnect between the NAV and the share price. In our view, this serves to highlight the potential opportunity, especially given the attractive long-term income profile of TRIG, and the potential for capital growth with Fig Power and the trust’s development activities. TRIG remains a quality offering amongst the peer group. Any narrowing of the discount would serve as an accelerant to shareholder returns, over and above the NAV returns generated.