VH Global Sustainable Energy Opportunities 11 September 2024
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Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by VH Global Sustainable Energy Opportunities. 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.
VH Global Sustainable Energy Opportunities (GSEO) is a global renewable energy infrastructure trust specialising in assets relating to the global energy transition, with the current portfolio focussed on the US, UK, Australia and Brazil. GSEO’s target return of over 10% is higher than average for a renewable infrastructure trust and reflects that it may take on projects at the construction phase as well as operational assets with scope for active management.
As well as geographical diversification, the portfolio is also diversified compared to peers in terms of the technologies and stages of energy transition, such as fuel storage, flexible generation or co-located solar and battery storage assets, and with a bias to assets where there is a construction or expansion angle, or a financial or operational optimisation opportunity. The current portfolio is concentrated, with the largest three assets valued being 50% of NAV. Over time this concentration should reduce as other assets in the portfolio go through further construction and expansion, with resulting increases in value.
The trust is managed by Victory Hill’s co-chief investment officers Richard Lum and Eduardo Monteiro. They lead a team of eight experienced investment professionals, with the single focus of managing GSEO.
GSEO yields 7.6%, and has a progressive dividend policy, supported by the fact that 90% of cashflows have some form of inflation link. The dividend is fully covered, and GSEO has very little gearing, c. 2%, and this is all secured against GSEO's largest asset, meaning that the dividend does not rely on gearing, nor do higher interest rates present a challenge to the cover.
GSEO trades at a c. 35% discount, wider than the peer group average of c. 23%, and the board has instigated an active share buyback programme, which we chart in the Discount section, which will enhance both the NAV and earnings, and potentially alleviate the discount.
While the path to lower interest rates now seems a bit clearer, the challenge that many renewable energy infrastructure trusts now face is that the accompanying return to regular-as-clockwork new capital raisings seems like a much longer journey, and many are now pivoting business models to suit more austere times. GSEO's strategy has, from inception, been centred on projects with scope to enhance earnings through a variety of means, such as operational or contractual improvements, or by taking some construction risk to expand or roll out projects. While this still requires equity, the amounts are smaller than required to purchase fully operational assets. The team's decision not to employ gearing in most projects gives greater flexibility in this respect, as they could now choose to use small amounts of gearing instead of equity to move the existing portfolio along.
The combination of, on the one hand, GSEO's minimal gearing, combined with its position higher up the risk curve than some of its more traditional peers that principally focus on efficient operation of assets, together with its wide discount make for an interesting proposition from both and income and capital perspective. First, with the caveat that this is an estimate, the team believe completion of their existing programme of construction might increase dividend cover to 1.5x, and second, moving from construction to operational results in an increase in NAV. At a point in the cycle when investors may well be looking to add more risk, rather than reduce it, GSEO could be a very attractive alternative.
Bull
- Exposure to energy transition through a portfolio unlike any other in the peer group
- Low gearing gives management greater flexibility on future funding requirements
- Wide discount and high and covered yield may provide a floor to the share price
Bear
- Portfolio is concentrated in comparison to the peer group
- While construction projects offer greater upside potential, they can be riskier
- Sector-wide sentiment remains weak