Results analysis from Kepler Trust Intelligence

Greencoat UK Wind PLC

27 July 2023

 

Greencoat UK Wind (UKW)

27/07/2023

Results analysis from Kepler Trust Intelligence

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.

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.

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. 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. 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.

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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