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William Heathcoat Amory
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Updated 27 Jul 2023
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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’s (UKW) NAV per share decreased in the period from 167.1p per share on 31/12/2022 to 165.8p on 30/06/2023, reflecting an increase in discount rates and lower short term power prices offset by higher short-term inflation and valuation gains from recent and committed investments.
  • Operationally, electricity generation for the period was 18% below budget owing to low wind. On the other hand, thanks to continued strong electricity prices achieved and inflation linked cashflows, net cash generated by the portfolio was £204.0m, with dividend cover of 2.1x.
  • As at 30/06/2023, UKW owned investments in a diversified portfolio of 46 operating UK wind farms totalling 1,652MW. Earlier this week, UKW announced a £450m investment into the London Array offshore wind farm, adding to the £320m recently commissioned South Kyle wind farm. The manager indicated that they see no shortage of accretive investment opportunities, fuelled by the challenging fundraising environment affecting all buyers (in both public and private markets). At the same time, the manager regularly reviews the portfolio for potential disposals, with a view to recycling capital into NAV accretive investments.
  • UKW remains well capitalised to complete on its near-term investment pipeline. Cash balances as at 30/06/2023 were £499m with zero drawn under the £600 million short term flexible gearing facility. Gearing as at 30/06/2023 was 34 per cent of GAV, with a weighted cost of debt of 4.08% across a spread of maturities (November 2024 to March 2036).
  • Chairman of the board Lucinda Riches said, “there should continue to be further opportunities for investments that are beneficial to shareholders. The Company will continue to maintain a strictly disciplined approach to acquisitions, only investing when it is considered to be in the interests of shareholders to do so. At the same time, we will also look at opportunistic disposals, given the current environment we are operating in”.

Kepler View

The results for the half year to 30/06/2023 illustrate the resilience of Greencoat UK Wind’s (UKW) business model. Despite the 18% lower wind resource, dividend cover was 2.1x over the period. The key to UKW’s resilience is the ability of the trust to meet the dividend, and reinvest surplus cash to grow the NAV. At the same time, conservative assumptions that underpin the NAV have helped to mitigate the effect of the discount rate used to value the portfolio increasing by a further 1%, reflecting higher interest rates globally.

Taking off costs (UKW has an OCF of 0.93%) from the levered portfolio return of 11%, the implied NAV total returns for shareholders based on current assumptions for inflation and electricity prices is c. 10% per annum. The discount to NAV at which the shares currently trade, assuming the discount narrows, will further boost these returns. In the announcement, the board appear to be taking a long-term view as regards the discount, suggesting that accretive investments and disposals of portfolio assets is a better and longer lasting use of capital than buybacks.

For the first time, the interim results show the manager’s expected dividend cover at different levels of wholesale power prices (shown below). This, in our view, is a significant development and will provide reassurance to investors on both the ability of the trust to continue to pay an attractive dividend, but also that barring a significantly lower power price, UKW will continue to have surplus cash to reinvest, providing good total NAV returns as well as a high and growing dividend. In summary, UKW’s fixed revenue base (linked to inflation) means that dividend cover is extremely robust in the face of downside power price sensitivities. A dividend that continues to increase with RPI is covered down to £10/MWh over the next 5 years.

Inflation is another important driver of returns, highlighted in the interims. UKW show that the trust’s returns have a high degree of correlation with inflation, with 1% higher inflation over all future time periods resulting in a 1 percentage point higher IRR (all else being equal). UKW highlight that in the short term, a one-off increase in inflation leads to a ratchet-like increase in portfolio cash flows that lock in for all future years. UKW highlight that interest rates (and therefore discount rates) are correlated with inflation, providing something of an offset to future interest rate moves.

As we highlight above, UKW’s balance sheet is robust with plenty of cash to deploy into accretive opportunities. Since IPO, aggregate historical dividend cover has been 2.0x, with UKW so far reinvested £806m, helping to delivered NAV growth significantly in excess of RPI. This track record suggests that UKW’s model is self-funding and does not rely on further equity issuance, and is an important consideration given the current discount to NAV that the shares trade at.

In summary, with the levered portfolio return now standing at 11%, the after fees prospective NAV return of 10% looks attractive in a risk adjusted basis against many other investment opportunities. The assumptions underpinning the NAV are conservative, and the managers point out that the portfolio has proved robust in the face of downside power price sensitivities, whilst offering upside to power prices, inflation, asset life extension, asset optimisation, new revenue streams, and the interest rate cycle.

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