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Making a clean profit from a desire for yield

Richard Crawford says why he has diversified Renewables Infrastructure's energy exposure
March 21, 2019

Rising environmental concerns over the climatic impact of fossil fuels have prompted rising investment in renewable energy – power generation from sources such as solar and wind. As a result renewable energy plants and infrastructure have attracted investor attention and government subsidies, and their relatively high yields also make them a potentially lucrative investment option.

Not surprisingly, there are an increasing number of funds investing in this space due to investor demand. These include a number of investment trusts that are trading at a premium to net asset value (NAV) as both professional and private investors look for yield. One of these is Renewables Infrastructure Group (TRIG), which has succeeded in growing its dividend and share price since launch in 2013. It invests in a range of renewable energy sources rather than focusing on one area, as some trusts do.

Renewable Energy Systems runs day-to-day operations of its assets and InfraRed Capital Partners focuses on finding new opportunities to invest in, and growing the trust’s portfolio and energy production. Richard Crawford, director of infrastructure at InfraRed, is responsible for seeking renewable energy investment opportunities such as wind farms, solar parks and energy storage facilities. He says the fund's investments in aggregate generate 1.1 gigawatts of energy from a spread of assets located in the UK, Ireland, France and Sweden.

The trust was initially focused on the UK but has since increased its overseas exposure as UK government subsidies for renewable energy have fallen or shifted to larger projects such as offshore wind farms – from which returns can be more irregular. For example, it has recently acquired the onshore Jädraås wind farm in Sweden, boosting its geographical diversification.

“We have looked more at European countries, like Ireland, France and most recently Sweden, where we have seen more onshore wind investments," says Mr Crawford. “In future, we expect more onshore wind and solar – the current UK government’s preference is to target offshore wind, but this could change.”

Subsidies have been a major attraction of renewable energy investment. Funds either receive financial aid when operating these assets or a government-backed, guaranteed and inflated price for the electricity they generate from them. Renewables Infrastructure Group makes around two-thirds of its revenue from subsidies and one-third from selling energy to the grid at market value.

“We’re looking to build a portfolio with a sensible balance between subsidies and power sales," says Mr Crawford. "That will be done more easily if we invest in countries where there are more subsidy opportunities."

Both subsidies and power generation have helped the trust’s performance recently. In 2018 it made a NAV total return of 11.6 per cent and a share price total return of 10.7 per cent. Analysts at broker Winterflood say this was despite the trust's investments generating less energy than its managers had hoped they would due to lower wind speeds. The shortfall was offset by higher prices for solar power, which they say shows the benefits of diversification.

The trust is paying a dividend of 6.5p a share in respect of its 2018 financial year, which puts it on a yield of around 5.5 per cent. Winterflood says the trust's NAV has the potential to grow further. The trust also plans to issue shares at a price of 114p each to raise gross proceeds of up to £171m, which could help to reduce the premium to NAV.

UK equities are no longer a popular hunting ground for international investors due to concerns such as Brexit. But Mr Crawford says this has not affected renewables infrastructure investment opportunities or the fierce demand for these kinds of assets in the UK.

“There is still very keen interest in the assets that come to market,” he says. “Renewables are seen to offer some defensive characteristics – despite broader political uncertainty over Brexit and which government is in charge. Although other sectors could be impacted, I haven’t detected any reduction in interest in this asset class generally.”

This competition and changes in where UK government subsidies are being directed have led him to broaden the trust's investment focus. Last year, for example, it acquired a battery plant – a departure from its traditional focus on wind and solar power. At the end of 2018, the trust had 72 per cent of its assets invested in onshore wind, 19 per cent in solar plants and 2 per in battery plants.

“We will see increasing development of flexible capacity assets, including batteries," says Mr Crawford. “We haven’t seen significant volumes yet, but as the costs of renewable energy production come down, the system needs more flexibility to cope and we will see more opportunities.”

Renewables Infrastructure Group's board is targeting a dividend of 6.64p for this year, a rise of 2.2 per cent, as it looks to maintain its appeal relative to other income trusts.

But Mr Crawford adds: “This trust [also] plays nicely into the sustainability theme. The reason this asset class exists is because of the need to de-carbonise and that need is only becoming more acute – it’s an expanding sector. Investors are looking to make an impact and Renewables Infrastructure Group is measurable in terms of tackling CO2 emissions."

 

Renewables Infrastructure Group (TRIG)

PRICE116.4pGEARING0.00%
AIC SECTORInfrastructure – Renewable EnergyNAV113.2p
FUND TYPE Guernsey domiciled investment companyPRICE PREMIUM TO NAV2.8%
MARKET CAP£1.37bnYIELD5.60%
No of HOLDINGS62*ONGOING CHARGE1.12%*
SET-UP DATE29/07/13MORE DETAILStrig-ltd.com

Source: Morningstar as at 14/03/2019, *InfraRed Capital Partners

 

Performance

Trust/index1-year share price total return (%)3-year cumulative share price total return (%)5-year cumulative share price total return (%)
Renewables Infrastructure Group18.0438.9955.67
AIC Infrastructure – Renewable Energy sector average12.1437.5746.52

Source: FE Analytics, as at 14/03/19

 

Top 10 holdings (%)

Jadraas11
Erstrask10.0
Garreg Lwyd7.0
Crystal Rig 26.0
Sheringham Shoal5.0
Solwaybank5.0
Mid Hill4.0
Clahane4.0
Hill of Towie Wind Farm3.0
Green Hill Wind Farm33.0

Source: Renewables Infrastructure Group as at 31/12/18

 

Sector breakdown (%)

Onshore wind72.0
Solar PV19.0
Offshore wind7.0
Battery2.0

Source: Renewables Infrastructure Group as at 31/12/18