William Heathcoat Amory
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Updated 31 Oct 2023
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Disclaimer

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Greencoat UK Wind. 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.

  • Greencoat UK Wind (UKW) last week announced an updated NAV of 165.8p, together with an increased dividend and a proposed share buyback. The updated NAV was flat after the payment of a dividend, reflecting lower long term power prices reflected in the valuation, to an extent mitigated by the valuation increase of the newly acquired stake in the London Array offshore wind farm, which was completed during the quarter at an IRR ahead of the portfolio (i.e. an accretive investment).
  • The portfolio now comprises interests in 48 operating wind farms totalling 1,973MW. In addition, UKW has a remaining £5.9m committed to acquire 49.9% of Kype Muir Extension for a total of £51.4m, adding 33.5MW net generating capacity. The investment is expected to complete in Q4 2023.
  • In recognition of strong projected cash flow, the board has decided to raise the annual 2024 financial year dividend target to 10p per share, an increase of 14.2% over the 2023 target dividend of 8.76p per share. This increase is significantly higher than the forecasted December 2023 RPI inflation and shows the board’s confidence in UKW’s model. In addition, the board has decided to pay a 3.43p per share dividend for Q4 2023, increasing the 2023 full year dividend target to 10p per share.
  • Lucinda Riches, Chairman of Greencoat UK Wind, said: " Reflecting our market leading position, as well as the Company's strong prospects, balance sheet and cash flow generation, I am pleased to announce … the launch of a share buyback programme of up to £100 million, to the benefit of our shareholders."

Kepler View

This is a bullish statement from the board, and reflects the seeming disparity between the share price and the underlying performance of Greencoat UK Wind (UKW). Alongside the peer group and wider investment trust sector, UKW’s discount has widened. At the point of the announcement, it had reached c. 21%, but the shares have rallied since then and the discount is now c. 18%. On the other hand, cashflows appear resilient. In the interim results, UKW provided a detailed scenario analysis on dividend cover based on different short term power prices (shown below, we note that the 2024 dividend target is now 10p, up from the 9.37p in the table below). This highlighted that unless power prices fell significantly, UKW would have significant excess cash with which to invest in further assets, repay debt or buy shares back. It would appear that the current discount to NAV has prompted the board to state more clearly that at current levels, they favour buybacks. We note that the £100m buyback will be spent based on pre-agreed parameters over the next 12 months. Any purchase will be announced no later than 07:30 am on the business day following the calendar day on which the purchase occurs.

Based on the size of the trust and current power prices, UKW’s managers say that the trust may generate around £200m of excess cash per year – over and above the dividend. Even if the share buyback is fully used up this year, this potentially leaves firepower for retiring debt and/or further acquisitions. UKW has a £400m flexible credit facility that is paying a relatively high interest rate, with further fixed rate debt maturing from the end of 2024 onwards. Depending on the path of future interest rates, and the rate at which these borrowings could be refinanced at, the company may choose to retire debt.

Whatever the eventual capital allocation decision that is made, the point is that UKW has options. This is a result of the high total returns that UKW invests in, and the fact that debt is largely held at the company level rather than asset level. The prospective IRR to investors (on a NAV basis, net of fees) based on the valuation discount rate is 10%. If the board are successful in buying shares back at a wide discount, then the NAV will be enhanced. On the other hand, if the discount narrows, then shareholders will see a decent share price total return from the current price. In the meantime, with the prospective dividend yield of 7.4%, shareholders are arguably being paid to wait.

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