In this publication, Hardman & Co’s focus is on the nine quoted Infrastructure Investment Companies (IICs) and on the 22 Renewable Energy Infrastructure Funds (REIFs), as we update our publication of January 2022 and address two key issues of recent months – rising inflation and surging power prices.
The stocks analysed are all members of the Association of Investment Companies (AIC). As a group, their combined market capitalisation is currently £31.6bn. The most valuable IICs are HICL Infrastructure and INPP – both are currently capitalised at over £3bn each. The largest REIFs are Greencoat UK Wind and TRIG, which are capitalised at £3.6bn and £3.3bn, respectively.
Sharply rising inflation, and not just in the UK, remains a real concern for many investors. In fact, IICs and REIFs, to varying extents, derive material benefits from higher inflation, providing – in an admittedly unlikely scenario – that it is not accompanied, in time, by higher interest rates.
The impact for the leading REIFs of soaring gas prices – the spot price rose from 50p per therm in April 2021 to over 450p per therm just eight months later – is wide-ranging, and the pronounced upward impact on their long-term valuations is very relevant for investors. This process has already become apparent, since long-term power price assumptions are a key factor, along with the discount rate, in determining the NAVs of most REIFs. Foresight Solar’s 27.4% increase and JLEN’s 25.1% increase in their NAVs between March 2021 and March 2022 are clear examples of this trend.
All the REIFs and, for the most part, the IICs have weathered COVID-19 with relatively minor dislocation. However, some IICs, including HICL Infrastructure and INPP, have suffered, due to their exposure to demand-based transport investments. Others, such as 3i Infrastructure, have prospered, with their shares rising by ca.40 since March 2020.
Around 50% of the REIF sector’s £16.4bn valuation is accounted for by wind power generation. On the back of generous subsidies, the UK wind power sector has expanded, and now exceeds 24GW of capacity, while UK solar capacity is currently almost 15GW. The removal of subsidies for new solar plants from 2017 remains challenging, although unit costs have plummeted.
Offshore wind power is the new “go-to” investment sector. Given the sea change in costs, the government is seeking a quintupling of offshore wind capacity by 2030. The pivotal 2019 auction for the development of some North Sea sites saw several Contracts for Difference (CfDs) being awarded. The lowest, on the Dogger Bank, was struck at just £39.65p (2012 prices) per MWh, and this July’s auction saw a record low price of £37.35p per MWh.
The underlying sector premia over the NAVs vary markedly among the IICs – the highest premium, at 14.4%, is for BBGI, whose Total Shareholder Return (TSR) since its IPO in 2011 has been 10.4% per year, and it has consistently traded at a sizeable premium to its NAV.
For the REIFs, the standout performer has been Gresham House Energy Storage; its shares are currently trading (driven, in part, by its very conservative 10.7% discount rate) at a 20.5% premium to its latest published NAV. However, on the back of winning T1 and T4 contracts in the recent capacity auction, it has flagged an expected rise in its NAV to ca.145p per share, as calculated at June 2022. By contrast, shares in HydrogenOne Capital, which floated in July 2021, have fallen by 29% in the year to date, and Aquila Energy Efficiency’s shares are down by 21% since its IPO in June 2021.
While virtually all established IICs and REIFs have avoided nominal dividend cuts, any increases, with a few exceptions, have been modest. 3i Infrastructure, whose dividend rose by 6.7% in 2021/22, is planning a similar rise in 2022/23, while Greencoat UK Wind, which links its dividend payments to the RPI, has raised its payment by 7.5% for 2022.
