Well-deserved expansion for Ecofin Global – Ecofin Global Utilities and Infrastructure Trust has published results for the year ended 30 September, 2020.
Highlights
- During the financial year ended 30 September, 2020 the company’s net asset value per share decreased by 2.6% and the price of an ordinary share increased by 5.6%, both on a total return basis (assuming the reinvestment of dividends). Both were well ahead of the equivalent returns on the MSCI World Utilities Index and the S&P Global Infrastructure Index of -6.9% and -18.6% respectively;
- The discount to NAV at which the shares traded narrowed significantly and averaged 2.6% over the year; during the 6 months to 30 September, 2020 the shares traded at an average premium to NAV of 0.4%;
- Four quarterly dividends totalling 6.55p were paid – an increase of 2.3% from the previous year, providing a dividend yield (annualised) of 4.1% on 159.25p, the price of the company’s shares as at 30 September, 2020;
- Quarterly dividends are being maintained at 1.65p – implying an uplift in the dividend in the current year to at least 6.6p – despite the COVID-19 related fall in income.
- The NAV per share increased by 39.4% (8.6% per annum) on a total return basis from admission on 26 September, 2016 until 30 September, 2020 and on the same basis its share price increased by 70.8% (14.3% per annum); and
- Subsequent performance has been strong: from the year-end on 30 September, 2020 to 30 November, 2020, NAV per share increased by 10.3% and the share price by 13.2% (both on a total return basis). Over one and three years, the performance of both the portfolio and the share price have been ahead of the MSCI World Index and all the relevant sector indices.
- Since late April and up to 9 December, 2020, 4,731,176 new shares have been issued at a premium to NAV.
The chairman says “Our sector, historically regarded as mature and primarily income generating, is evolving into one offering significant long term growth as well.”
Extract from the manager’s report
“The best contributors to NAV during the year were all amongst the largest 10 holdings and again included NextEra Energy, one of the world’s largest investors in renewables. Along with two strong quarters, NextEra recently announced the acquisition of a transmission company, which will increase its regulated asset base and therefore its ability to fund growth, and a pilot investment in hydrogen which it sees as a promising emerging renewable energy technology (to sit alongside wind, solar and battery storage). NextEra also reported that its inventory of planned projects (approximately 15,000 MW) is now larger than its existing renewables portfolio. We expect at least 6-8% earnings growth in the coming years supporting annual dividend growth in the region of 10%.
Two holdings, Terraform Power (or TERP, one of the best performing yieldcos this year even prior to this deal) and its parent Brookfield Renewable Partners (which owned 62% of TERP), merged in July to form Brookfield Renewable Corporation, creating a giant pure-play renewable energy company with 19,000 MW of installed capacity in North America and Europe and an almost equally large pipeline of development opportunities. Brookfield has recently increased its investment target and guided cash flow growth to the top end of its range (6-11% per annum).
EDP was the largest contributor to NAV over the 12 months ending 30 September, with the shares rising nearly 25% (30% total return) as the company delivered on its planned disposals, selling a large portfolio of hydroelectric power plants in Iberia and its supply business in Spain at attractive multiples, while also continuing to realise value (and capital gains) on periodic asset rotations in the renewables portfolio, which this year encompassed wind assets in the US and Spain. In July, EDP also agreed to acquire Viesgo, a Spanish operator of power distribution grids and renewables in a deal financed through a €1 billion rights issue which was more than fully subscribed. The disposals combined with the equity raise brought EDP’s leverage down to the lowest level in over a decade, setting a solid basis for the company’s planned acceleration in renewables growth.
RWE was the largest contributor to NAV over the last 6 months – and consistently top 5 over the last 3 years – as the shares have re-rated from a deeply discounted valuation thanks to a substantial simplification of the company’s portfolio and its radical transformation into a global renewables major. Its €2 billion capital increase this summer, to allow the group to accelerate its expansion in wind and solar projects, was heavily oversubscribed. Enel, majority owner of Endesa, has been comparably impactful on the NAV; Enel has been a pioneer in renewables for decades (in Europe as much as in North and Latin America), and this year moved to dramatically accelerate its exit from coal which should be phased out before 2030, well ahead of the schedule set out only a year ago.
On the other side of the ledger, US waste management and waste-to-energy company Covanta and environmental services companies Veolia and Suez did not perform well as industrial volumes came under real pressure. Covanta cut its dividend in April, citing uncertainties created by COVID-19 and slow growth prospects until UK plants come online at the end of 2022 and in 2023. We believe that Covanta is a structural beneficiary of the shift away from waste disposal to landfills and that it has the potential to become a larger player in the circular economy and material recycling. As the company undergoes a full strategic review (announced in October), we expect it to articulate its capital allocation and growth strategy more clearly, which should be well received by the market. The French government’s suggestion that various French companies suspend or reduce their dividends placed additional strain on the share prices of Veolia and Suez, as well as Engie.
In North America, utility valuations fanned out; those with solid green credentials traded to higher relative valuations, while several others traditionally focused on fossil fuel assets began to reorganise their business mix to improve their sustainability profiles, in the hope of shedding their valuation discounts.
Transportation infrastructure businesses immediately felt the force of the economic and traffic downturn as a natural consequence of the lockdowns and their subsequent recovery was patchy. In general, road operators fared better than airports. ENAV, which manages Italy’s air traffic services, and Beijing Capital International Airport, both small holdings, together negatively impacted the NAV by c. 1.0% during the year due to the substantial decline in their share prices which only began to revert in November as a result of encouraging results from coronavirus vaccine trials.”
[Ecofin Global Utilities and Infrastructure is building an impressive track record and this, coupled with an attractive yield, is resulting in a well-deserved expansion of the trust. In recent meetings with Jean-Hugues de Lamaze, the trust’s manager, he is enthused about the trust’s long term prospects.]
EGL : Well-deserved expansion for Ecofin Global