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Premier Energy & Water says utilities pull back has created opportunities

Premier Energy & Water has published its interim accounts, covering the six months to the end of June 2015. The period was a difficult one for the global utilities market, as evidenced by a -7.5% return on the FTSE All-World Utilities Index but Premier Energy & Water did much better than this with a return on the total assets of the fund of -0.3%. The gearing effect of the zero dividend preference shares meant that the net asset value total return fore the ordinary shareholders was -5.4% for the period but an improvement in the rating of the fund resulted in a -3.0% return to ordinary shareholders. However, whilst H1 has been challenging, the managers say that market movements have presented the opportunity to add some new holdings, at attractive levels, with the sector now trading at a marked discount. The dividend for the first half was maintained at 5.3p, 1.5p of which is a special dividend.

The report says the portfolio’s out-performance against these indices in the half year can largely be ascribed to an underweight position in European and US utilities, and the performance of its emerging market investments, with some excellent returns achieved by the Hong Kong listed Chinese utilities in particular. Premier Energy & Water’s Chinese investments are all Hong Kong listed, a market dominated by institutions rather than retail investors, which has shielded the portfolio from some but not all of the volatility. A significant negative factor was the weakness of many currencies in which PEWT invests (the Euro fell by 9.5%, the Polish Zloty by 7.0%, the Brazilian Real fell 17.7%, the Malaysian Ringgit by 8.9%, and the Chilean Peso by 8.9%) whilst Sterling also strengthened marginally against the US dollar.

PEW’s ZDPs mature at the end of 2015. Based on the number of ZDPs in issue at 30 June 2015, the ZDPs have a final repayment value of £48.7m. During the second half of 2015, the Board and investment manager will be meeting with existing ZDP shareholders with the intention of establishing a follow-on instrument into which existing ZDP shareholders can transfer their current investment if they so choose. They say that the nature, size, and pricing of the replacement financing will be depend on investor demand and market conditions as we progress through the second half of 2015.

With regards to portfolio developments, OPG Power completed its capacity expansion programme and barring the announcement of any new projects, PEW’s managers say the company should become very cash flow generative from here. OPG  have indicated a maiden dividend will be paid in respect of the financial year to March 2016. Fortune Oil was sold in the period with the company being taken-over by its main shareholder.Renewable Energy Generation had a disappointing H1 (its share fell 19.2%) but PEW’s managers say that the fundamental valuation remains intact and that changes to the UK subsidy regime should hasten REG’s move toward a cash generative “utility” business model. Following the pullback in US utility valuations, the manager has selectively built some positions in new US names. The largest of these TECO Energy, a Florida based utility, which in the managers view has little regulatory risk and has a high yield that should bolster PEW’s revenue earnings. Shortly after the period end, PEW’s holding in the Ecofin Convertible Loan Notes was sold because, whilst the notes paid a high coupon, the potential conversion upside has not materialised, and the manager considers this unlikely to occur before the notes’ maturity in July 2016.

You can access the manager’s website here.

PEW : Premier Energy & Water says utilities pull back has created opportunities

 

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