The market was waiting for bad news from Renewables Infrastructure Group (TRIG) which in an unscheduled update unveiled a 4% first half drop in net asset value (NAV) on Friday following rival Greencoat UK Wind UKW) posting a 4.4% decline last Wednesday.
Still there was plenty in the trading update, which preceded the release of interim results this Friday, for analysts to get stuck into given the board’s warning that cover for the 7.55p per share dividend “may be tight” due to the fall in cash generation.
Ben Newell, analyst at Investec, one of TRIG’s corporate brokers, reiterated his “buy” recommendation for the near-9% yielder given shares in the £2bn company were 21% below asset value, a discount that has now risen to 26%, and offered a “steady-state return” of around 11.8%, although he cautioned “that this return is predicated on cash generation being in line with the budget per the NAV”.
“This is clearly a challenging time for the renewables funds which have material exposure to wind, given the ongoing trend of low wind speeds and below budget generation,” he said.
Iain Scouller of Stifel, which last week downgraded TRIG, UKW and Greencoat Renwables (GRP) to “negative” from “neutral on account of the pressure on NAVs, weak generation and low dividend covers,” said TRIG shares deserved to trade at around 78p and a 28% discount (instead of their current 83.4p). “Given the risks … we think a c.1x yield premium to the UK gilt yield is appropriate for the wind funds.” He expected the solar funds to report more positive updates in the coming weeks.
Forecast alert
Winterflood’s Ashley Thomas noted “an increasing spread in forecasts” after Afry, the most conservative of three independent forecasters alongside Aurora and Baringa, had “materially reduced their expectations for the growth of electricity demand”, according to TRIG, leading to 2.5p of the NAV per share decline with a further 1p reduction from below-budget generation. Of the other two consultants, Thomas said one broadly maintained its forecasts and the other increased overall.
Ewan Lovett-Turner of Deutsche Numis, which rates TRIG a “core buy”, said: “After a big move from one of the power price forecasters, we expect investors will be keeping a close eye on upcoming updates from forecasters, although we understand that other forecasters have historically made more significant updates to assumptions in spring”.
Lovett-Turner said the government’s decision to avoid the disruption of “zonal pricing” could help improve sentiment if it revived transaction levels in the renewables market.
He said this could enable TRIG to sell more assets, reduce debt and recycle capital into higher return opportunities, adding “we believe there may give scope for realisation activity to pick-up, which investors will hope can be close to NAV. This would allow the manager repay/refinance debt and start to take advantage of a 1GW pipeline (40% wind/60% BESS), which could provide some interesting inherent value to be unlocked in the future, which management has previously highlighted presents an opportunity to deliver double-digit returns on a build-and hold basis.”
