There has been a raft of positive newsflow in the past few weeks from Gresham House (GHE:560p), a fund manager that specialises in renewable energy generation, solar power, wind, forestry, infrastructure funds and public and private equity investment strategies.
Firstly, Gresham House Energy Storage Fund (GRID:104.5p), a specialist investment company that invests in UK energy storage systems (ESS), has raised £41.6m in a placing, at 103p a share, and has now successfully raised the £200m outlined in November’s IPO. The company currently has 75 megawatts (MW) of capacity in six utility-scale operational ESSs, and subject to successful commissioning, purchase of assets in the pipeline and upgrades to existing projects, total capacity is set to rise to 229MW by the end of the first quarter of 2020, hence the rationale for the equity raise.
In addition, Gresham House Asset Management, the fund management arm of Gresham House that manages Gresham House Energy Storage Fund’s projects, is conducting due diligence on a pipeline of projects comprising: four operational ESS with a total of 95MW connection capacity; and project rights for a further six ESS with a total of 240MW of connection capacity. The pipeline has an investment value, on an operational basis, in excess of £200m, highlighting how freshly raised capital can be rapidly deployed into income-producing assets.
Compelling economics of offshore wind power
It’s hardly surprising that the placing has been well supported, given that renewable energy is predicted to represent half of total UK electricity demand by 2021, and will rise sharply thereafter. The cost of building new wind power projects has fallen dramatically in recent years due to technological developments that have improved the economics of offshore wind farms, which is driving a huge increase in the commissioning of new projects. Indeed, the UK government awarded 5.5 gigawatt (GW) of offshore wind projects for commissioning between 2023 and 2025 in its biannual auction a few weeks ago. To put these contract awards into perspective, only 2.1GW of projects were awarded contracts in 2015 and 3.3GW in 2017.
Furthermore, the new capacity has been secured at just £39.65 per MW hour (MWh), a fraction of the £114 per MWh the UK government agreed to pay in the 2015 auction, and less than half the £92.50 per MWh that the UK government has guaranteed to pay French energy group EDF for electricity generation at its new nuclear reactor at Hinckley Point C, Somerset, which is due to come online in 2025, and will account for 7 per cent of the UK’s total electricity generation.
The point being that the ongoing downward trajectory in the cost of building new renewable energy assets in the UK is set to lead to a significantly higher deployment of renewables in the UK than the government currently predicts. That’s an issue because to support the transition to renewable energy sources, significant investment is needed in grid-scale battery storage, as growth in intermittent renewables increases the variability of power supply. Battery storage addresses this challenge effectively by absorbing or releasing power to the National Grid.
Moreover, the transition to renewables can only continue cost-effectively with the support of battery storage. This industry backdrop is very good news for the financial returns Gresham House Energy Storage Fund’s shareholders can expect to make, which underpins the company’s progressive dividend policy. Guidance is for a 4.5p a share payout for 2019. Clearly, this is positive for the fee income Gresham House receives, too, under its fund management contract. It’s not the only fund that has been increasing in size, either.
High-yielding infrastructure assets
That’s because Gresham House’s unlisted British Strategic Investment Fund (BSIF), a closed-ended Guernsey Limited Partnership that invests in relatively illiquid investments in UK housing and infrastructure-related assets, is well on course to have 60 to 70 per cent of its £165m investment commitments deployed by the year-end. Bearing this in mind, Greater Manchester Pension Fund and Greater London Authority have just made new commitments of £35m to the fund, and Greater Manchester Pension Fund has committed an additional £20m to a North-West co-investment portfolio, too.
BSIF’s cornerstone investors are the Royal County of Berkshire Pension Fund and Teesside Pension Fund, highlighting how long-term investors are attracted by the attractive risk-adjusted investment returns offered within the UK’s housing and infrastructure sectors, both of which have been identified by the UK government as being structurally important areas requiring local investment. As a closed-ended fund with a 12-year time horizon, BSIF invests with a long-term view targeting an 8 to 10 per cent annual net return including an annual income yield of 5 to 6 per cent. Investments targeted by BSIF include renewable energy, vertical farming (the practice of producing food and medicine in vertically stacked layers), waste recycling (specifically, for the healthcare industry), and key worker accommodation. Expect a final close of the fund in the first quarter of 2020 to boost its size further to around £250m.
|Simon Thompson's Bargain Shares Portfolio 2016 performance|
|Company name||TIDM||Opening offer price (p) 5.02.16||Closing bid price (p) 17.10.19||Dividends (p)||Total return (%)|
|Bioquell (see note one)||BQE||125||590||0||372.0%|
|Volvere (see note six)||VLE||419||1150||0||188.2%|
|Bowleven (see note two)||BLVN||18.935||10.25||15||55.8%|
|Gresham House Strategic||GHS||796||1110||43.35||44.9%|
|Juridica (see note three)||JIL||36.1||14||32||27.4%|
|Mind + Machines (see note four)||MMX||8||7.5||0||2.8%|
|Walker Crips (see note five)||WCW||44.9||25||5.59||-31.9%|
|FTSE All-Share Total Return||5180||7401||45.5%|
|FTSE Aim All-Share Total Return||747||1003||38.0%|
|1. Simon Thompson advised buying Bioquell's shares at 149p in February 2016. Bioquell bought back 50 per cent of shares in issue at 200p each in June 2016 through a tender offer, and Simon recommended buying back the shares in the market at 145p to give an average buy-in price of 125p (‘Bargain shares updates’, 22 Jun 2016). Company was taken over at 590p cash per share in January 2019.|
|2. Simon Thompson advised banking profits on half your holdings in Bowleven shares at 33.75p, and running the balance ahead of drilling news at the Etinde prospect in Cameroon in the second quarter of 2018 (‘Hitting pay dirt', 9 Apr 2018). The company subsequently paid out a special dividend of 15p a share on 8 February 2019. The total return reflects this share sale.|
|3. Simon Thompson advised buying Juridica's shares at 41.2p in February 2016. Juridica subsequently paid out a special dividend of 8p a share in June 2016, and Simon recommended buying shares in the market at 61p using the cash proceeds to take the average buy-in price to 36.1p (‘Brexit winners', 1 Aug 2016). Juridica then paid out a special dividend of 32p a share in September 2016 and total return reflects this distribution. Simon advised selling the holding at 14p ('Taking Q1 profits and running gains', 4 Apr 2017), hence the price quoted in the table.|
|4. Simon Thompson advised buying Mind + Machines' shares at 8p in February 2016. Mind + Machines subsequently bought back 13.22 per cent of the shares in issue at 13p a share. The total return reflects this capital distribution. Simon advised selling the entire holding at 7.5p which is the exit price stated in the table ('Strategic acquisitions', 9 May 2018).|
|5. Simon Thompson advised selling Walker Crips' shares on Monday, 4 March 2019 at 25p ('Bargain Shares Portfolio updates', 4 Mar 2019). This is the exit price quoted in the table.|
|6. Simon Thompson advised rendering 41.18 per cent of your holdings back to company at 1,290p a share. Tender completed 19 June 2019 ('Tenders, takeover and hitting target prices', 3 Jun 2019). Return is adjusted to factor in this capital return.|
|Source: London Stock Exchange share prices|
Double-digit growth in assets under management
By my reckoning, Gresham House has increased assets under management (AuM) by 12 per cent to £2.54bn since the start of 2019, all of which is organic growth, with the weighted-average length of management contracts being 16 years, highlighting the long-term nature of a high-quality income stream.
Profits this year will also benefit from a full 12-month contribution from acquisitions made in 2018 – Oxford-based FIM Services, an alternative fund manager specialising in forestry and renewable energy; and the earnings-enhancing purchase of the fund and the investment management business that runs Baronsmead VCT and two open-ended vehicles, LF Livingbridge UK Micro Cap Fund and LF Livingbridge UK Multi-Cap Income Fund.
The combination of the ongoing organic growth and the contribution from acquisitions explains why analyst Justin Bates at Canaccord Genuity is predicting a full-year operating margin of 34 per cent based on pre-tax profits trebling to £9.1m on annual revenue of £26.8m to produce 2019 adjusted earnings per share of 29p (up from 13.9p in 2018). On that basis, expect a 17 per cent hike in the dividend per share to 3.5p. In addition, Mr Bates predicts Gresham House will have cash and liquid investments worth £40.9m (146p a share) at the end of 2019, a sum worth a quarter of the company’s market capitalisation of £155m.
This means that the shares are priced on a cash-adjusted price/earnings (PE) ratio of 14, a relatively low rating for an operationally geared asset manager generating double-digit organic growth in AuM and at an increasingly higher profit margin, too. I also note from conversations I have had with Gresham House’s chief executive Tony Dalwood that the directors are considering making acquisitions to utilise the growing cash pile, having already proven their ability to integrate and add value to last year’s acquisitions.
So, having included Gresham House’s shares, at 312p, in my 2016 Bargain Shares Portfolio, and last advised buying at 555p (‘A mandate for highly profitable growth’, 16 Sep 2019), I not only reiterate my 700p target price, but now rate the shares a strong buy.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £3.25 [UK]. Postage and packaging is only £3.95 for purchases of both books.
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