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JLEN sets out its plans for the future

JLEN’s results covering the year ended 31 March 2020 have been published. Highlights for the period were:

  • NAV of 97.5 pence as at 31 March 2020 (31 March 2019: 104.7 pence), reduction primarily driven by the effect of the long-term power price forecast on the portfolio value
  • Total dividends declared of 6.66 pence (2019: 6.51 pence per ordinary share), in line with target.
  • Cash flow dividend cover of 1.1 times for the financial year (revenue earnings cover 0.98x).
  • Target dividend of 6.76 pence for current financial year
  • Overall portfolio performance slightly above expectations
    • Wind portfolio generation above budget due to particularly good wind resource in the last quarter
    • Solar assets slightly below budget for the year due to grid outages and repair works carried out under warranty
    • Anaerobic digestion assets continued to outperform during the year
    • Bio Collectors food waste project negatively impacted by Covid-19 pandemic as waste volumes fall. Other projects in the portfolio currently demonstrating resilience

Much of the detail behind this report has already been captured in our most recent note on JLEN.

Updated dividend guidance

It has been the directors’ intention to pay shareholders a sustainable dividend, paid quarterly, that increases progressively in line with inflation, subject to market conditions, performance, financial position and outlook. The company has never missed a dividend target during its six-year life and has grown the dividend consistently at a time when investors have found dependable income hard to come by, despite falling power price projections. After careful consideration, and in light of a weak outlook for a recovery in power prices exacerbated further by the Covid‑19 pandemic, the board has decided that it is prudent now to change the dividend policy to break the explicit link with inflation. The board also decided to increase the company’s dividend target to 6.76 pence per share for the year to 31 March 2021. Thereafter, the company will follow a progressive dividend policy. The board recognises the importance to investors of maintaining a sustainable and growing dividend and will aim to deliver that in the coming years.” [this is a prudent step given falling power prices but may not mean much in practice, for the short-term at least, as inflation is likely to remain low and we may even see deflation].

Future portfolio developments

“...The UK became the first major economy to make a legally binding commitment to reaching “net zero” carbon emissions (compared to 1990 levels) during the period, and there have also been positive signals regarding the inclusion of onshore wind and solar in future government subsidy rounds. While detailed plans addressing how “net zero” is to be achieved are still forthcoming, particularly for sectors previously considered hard to de-carbonise such as heat, it is very likely that the paths to “net zero” will require increased investment into environmental infrastructure.

Some of this investment will be into established technologies such as wind and solar that have already become core holdings for investors. As in recent years, the Board continues to see fierce competitive pressure in these markets, even as power price forecasts have reduced. It remains to be seen whether the Covid-19 pandemic leads to a re-evaluation of returns available, but the early signs do not suggest this. The Board does not anticipate material capital deployment here in the short to medium term, except through JLEN’s €25 million commitment to FEIP, which will be presented on a look-through basis to the assets.

Bioenergy assets remain attractive to the Company. The agri-anaerobic digestion sector has been a fruitful one for JLEN in recent years, and further opportunities are available. The Board aims to maintain a broadly diversified portfolio with a spread of risks, and so future investments in this sector are likely to be limited to those that feature links to the existing portfolio such that they offer a strategic benefit in addition to being good investments in their own right. Well-positioned food waste AD assets, such as the Bio Collectors investment, continue to be of interest in the light of legislative changes covering food waste collection, although the impact of the Covid-19 pandemic will need to be factored into any investment case. Biomass and energy-from-waste plants are also of interest, although large UK transactions attract significant investor interest and competition.

Beyond these sectors, the Board continues to believe that JLEN’s broad investment mandate provides investors with access to a wider range of environmental infrastructure opportunities that conform to the Company’s investment targets. Flexible generation projects remain of interest, as such assets should complement intermittent generators such as wind and solar and facilitate the further roll-out of renewables by helping to balance the grid. The Board is open to exploring the opportunities presented by the “energy efficiency” aspect of the investment policy, particularly where this can be combined with sustainability, as may be the case for low-carbon farming and forms of controlled environment agriculture.

Some future deals will include features that distinguish them from pure “project” deals according to a traditional “project finance” model, such as more exposure to merchant markets in feedstock or by-products, specialist staff within the project vehicle who are important to the project’s success, or assumptions around the re-purposing of plant beyond subsidy expiry to maximise economic life. An example of this in the period has been the Bio Collectors investment. As JLEN seeks to set its horizons further afield as the sustainability agenda takes hold, it is likely to become a fact of life for funds such as JLEN that wish to continue to acquire infrastructure projects without competing away returns in “cost of capital” auctions.

The Board will approach such risks selectively, with due consideration given to the Company’s ability to manage the risks and whether the returns on offer duly compensate for them, both in an absolute sense and relative to other environmental infrastructure markets. Where this is not the case, the Board will not invest, but we have always viewed the diversified mandate as a positive differentiator. JLEN was not launched as a fund to focus on a single project type, and so JLEN should be exploring these new “risk and return” profiles in the interests of investors.

While the Board continues to view the UK as the Company’s main geographical focus for capital deployment, the Investment Adviser has continued to present opportunities from European countries. This has undoubtedly been aided by the transfer of the team to Foresight Group and the origination network that is now available for the benefit of the Company. Where the risks and returns of such investments compare favourably to UK alternatives and there is a credible asset management strategy, then the Board will consider them positively.”

JLEN : JLEN sets out its plans for the future

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