(Updated with our comment) Gresham House Energy Storage (GRID) will only pay a minimum dividend of 0.11p per share next month as it focuses on investment in growth and upgrades to its battery portfolio.
In half-year results today, the £412m investment trust said it would resume dividend payments that were suspended last year in response to a sharp decline in UK energy trading revenues.
However, the company emphasised that its financial priority was completing the three-year plan unveiled last November and doubling its capacity from 1.7GWh to 3.5GWh. As part of that, it wants capacity from new projects to grow 65% from 1.1GW to 1.8GW by extending the average duration of batteries from 1.6 to around two hours.
Once construction spending was completed, assuming current merchant revenues of £75k/MW/Yr its portfolio could generate excess cash flows of about 10p per share. That would enable the restoration of covered half-year dividends from 2027 although it did not say at what level.
In an update to its capital allocation policy, the company told shareholders it would pay a covered single dividend of at least 0.25p next year.
This compares to the uncovered 5.5p and 7p total dividends GRID paid in 2023 and 2022.
Chair John Leggate said: “The board believes that the growth opportunities we see represent the best future total return for investors and we are pleased to see good support for the approach among our shareholders. The growth that GRID aims to deliver over the next two years should significantly increase the revenue-generating base for the company, which will in turn drive greater long-term returns for shareholders.”
GRID shares have rebounded 43.5% in the past year but remain on a wide 33% discount to net asset value in response to the volatility and uncertainty over battery storage revenues. At 73p they trade less than half their 179p peak in September 2022 and 27% below the 100p at which they launched in 2018.
The results showed NAV fell 1.5% to 107.71p per share in the six months to 30 June as higher valuations on new projects becoming operational could not offset the impact of further cuts in power price forecasts.
Nevertheless, underlying portfolio revenues jumped 76.9% to £31.7m from £17.9m a year ago, reflecting improved revenues and increased capacity. Net debt to NAV was 18% before the company’s recent refinancing with £160m of borrowing up £10m from a year ago with £48.2m of cash.
Our view
Matthew Read, senior analyst at QuotedData, said: “From an operational perspective, GRID continues to deliver with revenues and EBITDA almost doubling year-on-year, while achieving a notable milestone in surpassing 1GW of operational capacity. With augmentations underway, GRID’s battery fleet is steadily shifting towards longer-duration assets. The payback period on these investments tends to be short, reflecting the benefits of the additional revenue opportunities the longer-duration assets offer. However, the problem continues to lie in the valuation backdrop.
“There were a number of factors positively influencing the NAV progression, but the NAV still edged down at the margin, as third-party power price forecasts continue to be cut. This problem is not unique to GRID and has weighed on NAVs across the sector. However, these include assumptions about the amount of new generating capacity – including renewables – that will come online. We are increasingly wondering whether the projected power price falls may be overdone as, presumably, some of the expected new capacity will not be built if the price is too low.
“We think that the decision to prioritise reinvestment over distributions is probably the right one but shareholders who are waiting for meaningful dividends may not share this view as they will have to hold on until 2027 to see this happen. However, if GRID’s management can deliver on its three-year plan – doubling installed capacity to 3.5GWh and securing long-term contracted revenues – the fund should be in a much stronger position to provide sustainable income backed by a bigger, more valuable portfolio.
“Clearly execution risk remains – particularly around NESO’s queue reforms and the regulatory process – but if Ofgem’s rule changes (such as GC0166) and NESO’s reforms come through as hoped, shareholders could be well-rewarded for their patience.”
