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John Laing Environmental Assets offers income minus a hefty premium

This renewable energy infrastructure trust offers the benefits of infrastructure trusts but doesn't trade on a hefty premium to NAV
September 8, 2016

Low interest rates and Brexit-related fears have pushed up the premiums on infrastructure investment trusts as investors flock to what they see as higher yielding and safer assets, but renewable energy infrastructure trusts offering similar benefits have been overlooked. John Laing Environmental Assets (JLEN) boasts a high and sustainable dividend, and inflation-linked revenue without the eye-watering premium to net asset value (NAV).

IC TIP: Buy at 102.55p
Tip style
Income
Risk rating
High
Timescale
Long Term
Bull points
  • High yield
  • Rising dividends covered by income
  • Inflation-linked returns
  • Diversified portfolio
Bear points
  • Short-term track record

The trust invests in onshore wind energy and solar photovoltaics (PV), but unlike other renewable infrastructure investment trusts also has one-third of its assets in waste and water management. These are long-term projects with government-backed revenues, meaning the trust benefits from the income security of the infrastructure sector but with a lower premium to NAV.

Broad infrastructure investment trusts have an average premium to NAV of 19.1 per cent, which has resulted in their yields falling to an average 3.9 per cent, according to Winterflood. But JLEN yields 6 per cent and is trading on a far lower premium of 6.5 per cent.

Since launch the trust has paid out a consistently rising and well-covered dividend which is linked to inflation. At launch its target was to pay a dividend of 6 per cent a year, increasing in line with inflation. Its 2016-17 dividend target is 6.14p, an increase of 1.4 per cent on its dividend for the 2014-15 financial year. Its dividends have also been well covered by income - 1.2 times for the financial year ending March 2015 and 1.05 times for the year ending March 2016.

Like infrastructure funds, JLEN derives a large chunk of its revenue from private finance initiative (PFI) contracts (23 per cent), which offer long-term, government-backed sustainable income. That weighting also means that the trust is far less vulnerable than other renewable energy infrastructure trusts to the movement in the energy spot price. According to broker Stifel, "JLEN has a third of its portfolio in waste and water assets which have no revenue linkage to the wholesale power price, leading to the fund having the lowest sensitivity in the sector."

In addition, 41 per cent of its portfolio is in solar assets and 37 per cent in onshore wind, invested across 16 projects. Renewable energy generation can be highly variable and in the 2014-15 financial year wind generated 20 per cent less energy than anticipated. JLEN's mixture of wind and solar cushions it against concentrated risk in one sector and Winterflood says: "The annual results show that the fund has benefited from its diversification across a number of asset types, with higher than expected generation from wind assets offsetting lower levels of solar irradiation for the period."

Renewable energy assets also generate revenue from green tariffs in the form of feed-in tariffs for solar schemes and Renewable Obligation Certificates (ROCs) for wind energy. These are linked to retail prices index (RPI) inflation, meaning more than three-quarters of the trust's revenues are inflation-linked and a large chunk are government-backed.

Although cuts to subsidies for green energy are a risk they are unlikely to impact existing projects and the income attached to them. "While there have been changes to reduce support to the renewable energy sector through the Renewable Obligation and feed-in tariff schemes, the changes have been forward looking and so have had no impact on the existing portfolio or the fund's short-term pipeline of acquisition targets," says Winterflood.

The key risks to the trust's energy portfolio are the power price and short-term weather variation, while political will and future subsidies present longer-term risks. Those factors have weighed on returns in recent years and the trust has returned less than the renewable energy infrastructure investment trust sector average, despite its lower sensitivity to the energy price.

But JLEN is better valued than broad infrastructure investment trusts, and pays a consistently rising and well-covered dividend, so it still looks like a good way to get an attractive income without a hefty premium. Buy.

IC Tip Rating
Tip StyleIncome
Risk Rating High
Timescale Long term

 

JOHN LAING ENVIRONMENTAL ASSETS (JLEN)
PRICE:102.55pGEARING:*19%
AIC SECTOR: Infrastructure - renewable energy NAV:95.98p
FUND TYPE:Investment trustPRICE PREMIUM TO NAV:6.27%
MARKET CAP:£273.93mYIELD:6.02%
No OF HOLDINGS:16ONGOING CHARGE:1.52%

Source: Morningstar, as at 6.09.16. *Winterflood

 

Performance

 3-m share price return (%)6-m share price return (%)1-year share price return (%) 
John Laing Environmental Assets5.128.112.9
AIC Infrastructure - renewable energy sector average7.29.827.53

Source: FE Analytics, as at 6.09.16

 

Asset breakdown
Waste and water22%
Solar 41%
Wind37%

Source: Stifel, as at 6.09.16