GCP Infrastructure Investments (GCP) released its half-year report for the period ended 31 March 2023. The company’s total NAV return for the period was 2.7% while the total share price return was -9.7%. The company’s operational performance for the period was positive, generating operating income of £35.6 million, profit for the period of £25.8 million and paid dividends of 3.5 pence per share, in line with the target of 7.0 pence set for the financial year.
While operational performance has been consistent over the past two years, shares in the company have remained at a discount reflecting negative sentiment surrounding infrastructure projects. At 31 March 2023, the share price was 85.20 pence, representing a discount to NAV of 24.1%. This has widened to 33.5% at the latest close. The board and the investment adviser consider that the current share price does not reflect the ongoing positive performance of, and attractive risk-adjusted returns generated by, the company’s portfolio and have proceeded in a buy back programme that has seen the purchase of more than five million shares over the past few months.
[We have also noted on several occasions that discounts with the renewable energy infrastructure sector appear excessive based on the fundamental performance of the majority of these assets.]
Commenting on the performance and the outlook for the sector, the managers noted:
“The UK energy market is emerging from several years of unusual volatility. The reduction in economic activity as a result of the Covid-19 pandemic led to lower power prices; then in 2021 as the economy was recovering, a combination of below-average wind resources, maintenance of, and reduced output from, the French nuclear fleet and lower rainfall impacting hydro resources, prices started to rise. In 2022, with the Russian invasion of Ukraine, the sanctions and issues with gas exports from Russia led to significant price increases and volatility in both short and long-term price expectations.
“During the period, the volatility in, and high levels of, electricity prices was seen to favour renewable energy generators. As a result, the UK Government imposed the Electricity Generator Levy to tax what were considered excess profits. The introduction of this tax was announced in the Autumn Statement in November 2022 and the expected valuation impact was reported in the Company’s 2022 annual report: a reduction in the 30 September 2022 NAV of 1.50 pence per share. In December 2022, when the full details of the levy were announced, the actual impact of the tax was applied to the valuation of the portfolio. This impacted the NAV by 0.93 pence per share at 31 December 2022. The difference in the estimated and actual impact arose from the manner of the application of the levy to groups, demonstrating that the assumptions used were broadly accurate.
“In the period, short-term prices have fallen back below 2022 prices, and the UK energy market forward curves have been lower despite market shocks, such as OPEC+ announcing that it intends to cut output. Whilst long-term price forecasts have historically been on a downward trajectory, the Investment Adviser has seen a structural shift, increasing current long-term electricity price expectations.
“The long-term increase in prices can be explained by the increased focus on electricity security resulting from the Russian invasion of Ukraine. To reduce reliance on gas from Russia, the UK, and other European countries, will need to rely on imports of liquefied natural gas (“LNG”). In Germany, there has already been significant investment in its ability to import LNG, and this investment is set to continue. LNG tends to be more expensive (given costs to liquefy and regasify after transport) than piped gas and hence this will naturally increase long-term power costs.
“The drive for energy security, including increased renewable energy, will require significant investment across Europe and this is also expected to increase long-term costs. Furthermore, electricity demand is expected to increase, driven by the decarbonisation of transport and heating amongst other factors.
“The UK Government’s 2023 Green Finance Strategy sets out how it intends to mobilise green investment. It highlights that the transition to a low-carbon economy is not only an environmental imperative but a growth opportunity for the UK. With an estimated £50‑£60 billion of capital investment required each year to deliver the UK’s net zero ambitions, there is significant opportunity for private sector capital investment. This includes strategies to deliver up to 50 GW of new offshore wind capacity by 2030, up to 70 GW of solar capacity by 2035 and up to 10 GW of low‑carbon hydrogen production capacity by 2030.”
GCP : Discount opportunity for GCP