John Laing Environmental Assets has been busy, diversifying its portfolio – John Laing Environmental Assets Group Limited (JLEN) has published its results for the year ended 31 March 2018.
In what the company sees as an increasingly competitive markets in all of the main sectors that JLEN operates, the NAV per share was 99.6 pence, compared with 100.1 pence at 31 March 2017. The NAV of the portfolio was reduced as lower assumptions for long-term electricity prices had to be made and the value of its Dumfries & Galloway waste project was written off. Both of these and operational issues at the Branden solar project were partially offset by value enhancements and a change in the discount rate for the revenues of its UK wind assets.
The company continued to development and diversify its portfolio of environmental infrastructure assets. This included adding to its investment in anaerobic digestion. The company made six new acquisitions totalling £109.3 million, which added 81.8 MWs. One of these was internal within the John Laing Group (under the First Offer Agreement), whilst the other five were from third parties. The company now has a diversified portfolio of 24 operational solar, onshore wind, waste & wastewater and anaerobic digestion projects based in the UK and France. The total generating capacity is in the region of 259.2MW, which the company states are “backed by long-term contracts or stable regulatory-backed subsidy arrangements”.
Performance
Overall portfolio performance in line with expectations. Decreases in forecasts for long-term merchant electricity prices and issues with the company’s smallest investment, Dumfries & Galloway waste, as mentioned above were the main negative drivers. These were largely offset by limited discount rate changes for UK onshore wind and a number of portfolio enhancements and savings.
The value of the Dumfries & Galloway waste project has been written down to zero.
Wind portfolio generation was on budget with good availability. The anaerobic digestion assets purchased during the year performed 8% over expectation. However, the performance of the portfolio’s solar photo voltaic assets was down by 9%. JLEN, as with other companies operating in the solar sector, blamed lower amounts of sunlight falling on their plants during the year. There were also ongoing issues with the Branden solar project, where there were issues with faulty equipment. This has subsequently been sorted out. The processing of waste was in line with expectations. Wastewater volumes was below budget but offset by strong cost controls.
Dividends
The total dividends declared of 6.31p per share for the year to 31 March 2018 (2017: 6.14p per share). The dividend cover was 1.2 times. The target dividend for the year to 31 March 2019 is 6.51p per share.
Outlook from the chairman, Richard Morse
“The Board considers that the outlook for the company is one of opportunity. The pipeline of potential investments remains strong, both from John Laing Group, in accordance with the First Offer Agreement, and from third parties. The pipeline is also well diversified in terms of asset mix.
JLEN’s diversified environmental infrastructure mandate has meant that it has been able to focus on a wider segment of the environmental infrastructure market over the course of the period, as evidenced by recent investments in the anaerobic digestion sector, which offer established operational assets with attractive yield characteristics. The board considers that this trend is likely to continue, with further opportunities to pursue in AD as well as other bioenergy sectors such as biomass. While we will continue to look at wind and solar opportunities, recent experience of bidding for assets suggests that more attractive risk-adjusted returns are present in the wider environmental infrastructure sectors beyond wind and solar.
The board also considers that UK assets will continue to be the main focus for capital deployment over the short to medium term. Although JLEN has the mandate to invest in established environmental infrastructure assets in OECD countries which provide stable regulatory or contractual frameworks and the Investment Adviser considers overseas markets that may meet these criteria, the Board considers it unlikely that any of these markets provides superior value for the Fund presently, compared to its current pipeline of UK opportunities. The Board, reviews this assessment regularly and retains the flexibility to change focus if the assessment of relative value changes.
A feature of the market for renewables funds since the majority had their initial public offerings in 2013-14 has been the volatility in asset valuations brought about by reducing forecasts of future long-term electricity prices. One of the attractions of sectors such as anaerobic digestion is that operational assets typically have a higher subsidy element and a consequent lower relative exposure to merchant revenues. Going forward, the Board intends to prioritise acquisitions with lower merchant exposure in order to maintain JLEN’s low sensitivity to power prices, which supports the objective of paying a sustainable dividend that grows in line with inflation.
The challenge to realising the opportunities comes from ensuring that the Company has sufficient capital to be an attractive transaction partner in these sectors. The Company’s most recent equity placing came at a time of stress for equity markets. More recently, markets have recovered and the Board continues to believe that the existing portfolio is conservatively valued and will generate improved value as we continue with identified asset management initiatives. These include upgrades to turbines provided by a number of turbine suppliers in the portfolio, increasing capacity in the AD plants, and continuing to drive improvements and savings in projects’ contractual arrangements with third parties. The Board considers the Company to represent an attractive and differentiated offering to investors seeking a diversified pool of cash flows from environmental infrastructure assets.”
JLEN : John Laing Environmental Assets has been busy, diversifying its portfolio