Investment trusts that back renewable energy infrastructure are out of favour. All their shares trade at wide discounts to the value of their net assets, including those of the largest among them, Greencoat UK Wind.
Greencoat was the first renewable infrastructure fund to be listed on London’s main market. The FTSE 250 company now oversees 49 wind farms in Britain, with just over half of them under its sole ownership. Its single largest asset is a 12.5 per cent stake in the vast Hornsea One offshore wind farm, which is operated by Orsted, the Danish energy group, about 75 miles into the North Sea. Greencoat’s combined portfolio generates 4.7 terawatt-hours of renewable electricity, about 1.5 per cent of national electricity demand.
As well as its green credentials, a key draw for investors has been Greencoat UK Wind’s payouts. Its shares offer a chunky yield of 7.3 per cent, with a policy to increase dividends each year in line with inflation as measured by the retail prices index. About 55 per cent of Greencoat’s revenue is contracted and fixed over the next three years.
The trust aims to maintain a roughly equal balance between revenues from these fixed, inflation-linked government subsidies in the form of “renewables obligation certificates” and revenues obtained from other electricity sales.
That being said, sales are not hedged, so while Greencoat has benefited from higher electricity prices, it is also vulnerable to sharp declines in this market. Indeed, the trust has a higher exposure to wholesale markets than do some of its peers, but this is reflected in a higher discount rate that it applies to the future cashflows it expects from its wind farms, at 11 per cent.
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Low wind levels meant that portfolio’s power generation was below its targets in 2023 and the trust has not exceeded its own forecasts since 2017. This could be condemned as a failure, but it reflects the risky nature of forecasting a wind farm’s productivity — its “net load factor”, or expected output divided by its theoretical maximum output. Leverage also rose from 30 per cent to 38 per cent last year, although it is not as highly indebted as some, including Greencoat Renewables, its sister fund, which reported leverage of 51 per cent at the end of 2023.
There is much here that looks attractive. Government-backed contracts, a generous dividend policy and a green mission are all to be admired. Yet shares in Greencoat have lost about a tenth of their value in the past year, partly because of wider issues in the investment company marketplace, as higher interest rates make both alternative and income assets less attractive, as well as raising the cost of capital for wind farms.
The trust has been stuck at a double-digit discount for longer than a year. As such, it is compelled to hold a continuation vote at its annual general meeting in London on April 24. It looks unlikely that investors will vote for a winding up, especially as most shareholders rely on companies such as Greencoat to obtain exposure to infrastructure assets without dealing with their typical illiquidity. The company also has made an effort to help to close the discount, having repurchased 14 million shares as of the end of February as part of a £100 million buyback programme announced in October last year.
The trust still offers a meaningful diversification away from the main market and an inflation-linked dividend that is covered twice by net cash generation is hard to resist, especially at such a wide discount. That being said, investors should brace for the possibility of share price weakness for some time. This could be alleviated by possible interest rate cuts this year, but recent inflation readings in America suggest that this may be further down the line than once anticipated.
Advice Buy
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Why Good diversification for an investor with a traditional portfolio and at a deep discount. There is a well-covered, inflation-linked dividend
Mitie
Mitie knows all too well what it’s like to be out of market favour. The FTSE 250 company, whose services range from office cleaning to catering, issued multiple profit warnings in 2017 and a misstatement in its accounts eventually led to the sale of its lossmaking healthcare business. Then the pandemic struck, placing even further strain on its top line as offices shut.
Shares in the company now trade at about their highest level in six years. Revenues surpassed £4 billion for the first time last year, with operating profits, when including shares of profits after tax from joint ventures and associates, up by almost two thirds at £117 million.
Investors are eyeing up its security business, which has recorded a compound annual growth rate of 12 per cent in the past five years, counting public bodies such as the Bank of England and the Home Office among its client base. But Mitie is also taking profits and investing heavily in technology: so far this appears to be paying off, with a healthy return on invested capital of 25.4 per cent last year, above its 20 per cent target.
The company has a relatively thin operating margin of 4 per cent, which lowers to 3.8 per cent when excluding Covid work, but it has set out clear targets to improve this to between 4.5 per cent to 5.5 per cent over the medium term, via higher-margin business in longer-term projects and synergies from its acquisition of Interserve, its rival, in 2020.
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This column rated Mitie as a “buy” in June last year. Since then its shares have risen by a fifth or so. The company will publish an update on its final quarter on Monday and if the tone is anything like its update in January, which reported record revenue for its third quarter at £1.1 billion, then the shares could rise again. Mitie trades at a forward price-to-earnings multiple of 10.8, slightly above its five-year average of 10.2. For a company with a record £19 billion pipeline, an effective investment plan and a resilient client base, this looks a reasonable exchange.
Advice Buy
Why Effective investments in a growing market
