The energy crisis has highlighted the need for energy security to protect consumers and businesses as the world moves to more environmentally friendly sources of energy. It also highlights the need to double down on efforts to accelerate the transition away from fossil fuels.
Gresham House (GHE:810p), a fund manager specialising in renewable energy generation, solar power, wind, battery storage farms, forestry, infrastructure funds, and public and private equity investment strategies, is ahead of the curve. Since I first highlighted the group’s potential at the start of its journey in my 2016 Bargain Shares Portfolio, Gresham House’s shrewd management team has created a business that has consistently delivered strong organic growth. In 2021, the group increased assets under management (AUM) by two-thirds to £6.5bn, buoyed by 50 per cent underlying growth.
Renewables have played a significant part. For instance, Gresham House now manages solar and wind projects that generate enough electricity to power 131,000 homes, and manages 140,000 hectares of forestry that captures the equivalent CO2 generated by 266,000 people in the UK. The group’s environmental, social and governance (ESG) credentials are one reason why investors have been backing its funds, but ultimately AUM growth is being driven by its market-leading investment returns. Shrewd acquisitions are playing their part, too.
An ESG fund manager with smart credentials
- £1.9bn organic increase in AUM
- Full-year earnings per share (EPS) up 50 per cent to 49.4p and dividend raised from 6p to 10p
- New 2025 targets: AUM of £8bn, 40 per cent Ebitda margin and 15 per cent return on invested capital
Gresham House made eye-catching progress last year, increasing underlying pre-tax profit by two-thirds to £20.2mn. That was 30 per cent higher than analysts had forecast when I covered the interim results, even though they had pushed through 13 per cent profit upgrades at the time (‘Bargain shares: Profit from ESG investing’, IC, 13 September 2021).
Outperformance by Gresham House’s forestry funds has been one driver. They delivered £611mn of net new fund flows, buoyed by the £430mn mandate to manage the 24,800-hectare Australian forestry investment, Green Triangle Forest Products, and £202mn raised for the Gresham House Forest Growth & Sustainability Limited Partnership. The group’s mature retail forestry funds have produced an average return of 13.6 per cent since inception and delivered a gain of £531mn on a starting value of £1.8bn last year.
The UK imports 80 per cent of its softwood timber, so domestic prices are well-supported, especially as half of UK softwood is used for housebuilding, a sector that needs to scale up production to address the nation’s housing shortage. Moreover, with investors realising double-digit annual returns, there is no shortage of smart money looking to invest. Gresham House plans to launch £250mn of new forestry funds this year including a retail offering in the second quarter.
Other capital raises include Gresham House Energy Storage Fund (GRID), the largest listed specialist fund in UK energy storage projects (£280mn in debt and equity raised); British Strategic Investment Fund (£150mn); and Baronsmead VCTs. Organic growth has been complemented with strategic acquisitions, too. For instance, last autumn’s complementary £36.1mn acquisition of Mobeus, a UK-investment firm with four VCTs and AUM of £389m, has created a VCT platform with £887m of AUM.
Gresham House’s cash performance has been outperforming, too. Net cash of £40.2mn (106p a share) was well ahead of market estimates, and the group also has other liquid assets worth £38mn (100p a share). The healthy cash position provides ample firepower for more earnings-accretive bolt-on acquisitions. Following high single-digit upgrades, analyst Justin Bates at Canaccord expects 30 per cent growth in pre-tax profit of £26.3mn. This is based on AUM increasing 15 per cent to £7.5bn, an estimate supported by a raft of planned fund launches. On this basis, the shares are priced on a cash-adjusted price/earnings (PE) ratio of 13.
The shares have produced a 162 per cent total return since I initiated coverage and the 1,100p previous target price I outlined is looking increasingly conservative (‘A double bill of fund management plays’, 14 October 2021). Expect the payout to at least double over the next three years, too. Strong buy.
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