SDCL Energy Efficiency Income (SEIT) has announced its annual results for the year ended 31 March 2023. Key highlights from the report are as follows:
- Net Asset Value (NAV) per share of 101.5p as at 31 March 2023 (31 March 2022: 108.4p), which includes a reduction of 7.3p from 70bps increase in weighted average unlevered discount rate in the year
- Investment cash inflow from the portfolio of £85m, up 31% on a portfolio basis (2022: £65 million)
- Aggregate dividends of 6.0p per share declared for the year ended 31 March 2023, in line with target (March 2022: 5.62p)
- Dividend cash cover of 1.2x for the year to 31 March 2023 (March 2022: 1.2x)
- Target dividend of 6.24p per share for the year to March 2024, a 4% year-on-year increase
- Loss before tax of £18.6m for year to 31 March 2023 (31 March 2022: Profit of £79.8 million), includes unrealised loss of £81 million from discount rate increases
- Portfolio valuation of £1,100m as at 31 March 2023, up from £913 million at 31 March 2022
- Investment of c.£240m in new and organic investments and existing commitments during the year and a further c.£30 million invested since the year end
- Carbon savings of 1,202,528 tCO2 (March 2022: 1,060,617[2] tCO2) from company’s portfolio
Portfolio and financial performance
The portfolio, as a whole, generated sufficient cash to comfortably cover the company’s dividends paid in the year. SEIT chairman, Tony Roper, comments that, during the financial year, the company saw levels of volatility in global energy markets that have not been seen for many years; and regulatory responses to them created both short-term and ‘one-off’ setbacks for some of SEIT’s investments. Both SEIT’s Oliva and Värtan Gas were materially impacted by higher fuel costs combined with regulatory changes that have since been updated or been appealed. At the same time, some investments, such as Primary Energy, Värtan Gas, Onyx and Future Energy Solutions faced specific operational challenges.
SEIT’s portfolio is positively correlated to inflation over the medium to long term but, in the short term, increases in labour costs impacted returns on certain investments. Although most of the debt financing at the project level in SEIT’s portfolio was secured on fixed terms or hedged at relatively attractive terms, rising interest rates increased some project-level borrowing costs.
However, Roper comments that, despite these challenges, several investments also made progress, with for example RED-Rochester, Onyx and EVN all presenting opportunities to deliver additional long-term value. He also says that, in an environment characterised by a higher cost of capital, and given the upside performance potential from the portfolio, the board remains confident that SEIT can meet or exceed its stated target net total return of 7-8% per annum from its IPO price over the medium to long term.
Capital raise
SEIT successfully completed a £135m equity fundraise in September 2022, shortly before capital markets effectively closed. This fundraise, along with the existing revolving credit facility (RCF), gives SEIT greater flexibility to manage liquidity, invest in growth across existing portfolio projects and make new investments. SEIT continues to pursue a low-gearing strategy relative to the wider infrastructure peer group, with consolidated outstanding debt across the group representing approximately 32% of NAV as at 31 March 2023, in line with its medium-term structural gearing target of 35%. Roper says that SEIT does not have any near-term refinancing risk and that, as the manager is more focused on value enhancement from SEIT’s existing portfolio and its “organic pipeline”, rather than sourcing new investments, SEIT’s existing liquidity is considered sufficient for the foreseeable future.
Investment activity
SEIT’s manager has been focused on initiatives within the existing portfolio, which involves identifying sources of additional revenue, reducing costs or investing incremental capital for accretive returns. Roper comments that planning and implementation of these initiatives takes time, and while some value enhancement activity has been recognised in the current valuation of the portfolio, the majority will not be recognised until their implementation is proven. Opportunities for capital growth could also include utilising the capacity SEIT has to increase selectively its exposure to construction and development phase investments.
During the year, SEIT invested approximately £121m into six new investments and commitments and a further £119m into organic follow-on investments and commitments across 16 existing portfolio projects. Since the year end, a further two new investments of around £4m, plus a further £26m in follow-on investments across four existing portfolio projects have been made.
SEIT materially exited one investment during the financial year, through early repayment of its loan to the Biotown green gas project in the United States at a return above expected return for this investment. Disposals of less strategic or smaller projects, where a third party could derive greater value, are being evaluated.
Dividends
In line with previous guidance, in June 2023 SEIT announced its fourth interim dividend for the year ended 31 March 2023 of 1.50p per share, providing an aggregate dividend of 6.00p per share declared for the year ended 31 March 2023, which was fully covered by net cash income.
Roper says that, based on their assessment of current cashflow forecasts, SE|T is announcing new dividend guidance of 6.24p per share for the year to 31 March 2024 (an increase of 4%) and as before, targeting progressive dividend growth thereafter.
Share price discount to NAV and buyback programme
On 3 April 2023, SEIT announced a share buyback programme in response to the discount at which its share price traded relative to its reported NAV per share. As of today, SEIT has deployed around £14m of the £20m total buyback allocation.