TRIG - Renewables Infrastructure Group 26 October 2022
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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 total assets of c. £3.7bn and offering exposure across several geographies and types of renewable technology. Thanks to big changes to the macro picture, there are a number of key questions which investors need to resolve. We examine the influence of three key variables on TRIG’s NAV and returns: power prices, inflation and discount rates.
With regard to power prices, the EU’s price cap of €180/MWh is significantly higher than that assumed in the latest NAV. However, precise details of the UK’s mechanism are yet to be confirmed. If a rumoured cap of £60/MWh were adopted, this would clearly be negative for valuations across the sector. However, it is by no means certain that this is the level that will be arrived at. In the worst case then, there would be a fall in valuations. In a better case scenario, there may be little or no change to valuations.
Interest rate expectations have been rising, as have government bond yields. TRIG’s discount rate of 6.7%, as at 30/06/2022, compares to 20-year UK gilt yields now at 4.5%. This suggests that the implied risk premium relative to UK Gilts is too low and the discount rate should rise, meaning a fall in NAV, all things being equal.
On the other hand, inflation is an important determinant of cashflows and the NAV. Over the next ten years, 51% of TRIG’s revenues are directly linked to inflation, a significant majority being UK assets. It seems fair to expect that inflation will be a tailwind to revenues for TRIG, which will impact earnings positively (see Dividend section), and if it persists longer than currently expected, a buffer against the NAV reducing due to a rise in discount rates.
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. On the other hand, the picture is nuanced and whilst the short-term picture is changing very rapidly, more extreme conditions are unlikely to persist for the long term.
The coming few months will see more clarity, but as we discuss in the Portfolio section, whilst discount rates are a clear negative, inflation will prove a positive. In the lap of the gods, if we can call it that, is the impact from electricity price caps. The next scheduled NAV date for TRIG will be 31/12/2022, published in mid-February. However, we think it possible that the board will look to provide an updated NAV when the UK government publishes more definitive details on the proposed price cap.
As we discuss in the Discount section, the share price has fallen, reflecting uncertainty but also perhaps anticipating a fall in the NAV. Historically, TRIG has traded on a consistent premium to NAV. The share price fall of 20p over one month, i.e. a fall of c. 14% to 21/10/2022, may prove overdone if the UK government’s price cap is benign. 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.
Bull
- 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 rising discount rates
Bear
- Unclear what NAV is, given changing macro picture
- Specific risk from government legislation, i.e. the proposed renewables’ price cap
- Dividend cover not as high as that of funds which are not amortising, i.e. paying down debt