2022 Alternative Income Rating: Greencoat UK Wind
Disclosure – Non-Independent Marketing Communication. This is a non-independent marketing communication commissioned by Greencoat UK Wind. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
UKW’s size and robust model means we think it deserves to trade at a premium to peers…
This trust has been awarded a rating by Kepler for alternative income…Find out more
Greencoat UK Wind (UKW) offers exposure to a diversified portfolio of wind farms around the United Kingdom. UKW was the first trust to launch in the AIC’s renewable energy infrastructure sector and, as such, had a first-mover advantage in assembling a £4bn portfolio of assets, constituting 43 wind farms. UKW’s size has latterly allowed it to buy larger, more institutionally sized assets that benefit from economies of scale but also to become more diversified.
UKW’s proposition is a relatively simple one: to invest at high single-digit IRRs (8-9%), pay a dividend linked to inflation, and reinvest any surplus cashflows to grow NAV. In a typical year, the manager’s budget on dividend cover of 1.7x. Despite lower electricity generation during 2021 thanks to lower wind resources, higher electricity prices meant that dividend cover was 1.9x.
Reflecting the board’s confidence, UKW announced a target dividend for 2022 of 7.72p, which is an increase of 7.5% and is in line with the increase in RPI over 2021. As such, UKW offers a prospective dividend yield of 4.9% at current prices.
As a matter of policy, UKW does not fix any of its electricity price exposure. In an environment that has seen power prices at elevated levels, this puts it in an advantageous position. The board and manager are able to employ a policy of not hedging power prices because of UKW’s high budgeted dividend cover, which allows plenty of headroom in periods where electricity prices or energy generation might be lower, without stretching the trust’s ability to pay a covered dividend over the short term.
UKW remains the only renewable energy infrastructure fund to continue to explicitly state that its aim is to grow dividends in line with inflation. The advantage of UKW’s simple investment model is that it allows for a higher free cashflow than most peers, which, as we discuss in the Dividend section, affords it the ability to run with an unhedged exposure to electricity prices.
Clearly, this presents risks as well as opportunities, but this flexibility is conferring substantial benefits to shareholders currently; UKW has so far announced the largest targeted increase in dividend for 2022 of the peer group.
2020 showed UKW’s strength and resilience, but the second half of 2021 gave a taste of how UKW is able to benefit from higher energy prices. In the current environment, within the AIC Renewable Energy Infrastructure sector, it seems UKW is in a preeminent position to capture the benefit of these conditions.
We expect a NAV update from the trust in April 2022, which should show strong Q1 revenue generation, a period that has seen good wind resources and very high energy prices.
UKW has been amongst the best performing of the renewable energy infrastructure funds since it launched in 2013. Added to the immediate benefit from high energy prices, we also highlight UKW’s link to long term inflation. Currently, the assumptions underpinning the NAV look relatively conservative. If inflation persists, then this should lead to a tailwind to NAV returns, all things being equal.
- High dividend yield well covered by cash, lowest OCF in sector
- Continued commitment to RPI-linked dividend growth
- Uncorrelated assets, and committed pipeline of investments
- High premium to published NAV
- Gearing exacerbates underlying asset valuation movements
- Valuations based on long-term assumptions which may (or may not) prove optimistic
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