After a mixed 2022 for the 31 quoted Infrastructure Investment Companies (IICs) and the Renewable Energy Infrastructure Funds (REIFs), Hardman and Co reassesses the various challenges facing these stocks, five of whom – HICL, 3i Infrastructure, INPP, Greencoat UK Wind and TRIG - have market capitalisations of over £2.8bn. In particular, UK inflation of ca.10%, high energy prices (despite the recent sharp falls in spot gas prices) and rising interest rates are all impacting these quoted funds.
In 2022, only 10 of the 31 stocks saw their share prices rise. While energy price movements directly impacted those funds operating renewable generation plants, rising interest rates was a more general drag on the 31-strong sector. As such, net asset values (NAVs) were eroded by increased assumed discount rates: the NAV changes during 2022 varied significantly across the 31 funds. But their dividend payments held up, with no sector dividend cuts. Nevertheless, virtually all the dividend increases were nominal, rather than real - only Greencoat UK Wind has an inflation-linked dividend policy.
Executive summary
- Hardman & Co Research’s focus is on the nine quoted infrastructure investment companies (IICs) and on the 22 renewable energy infrastructure funds (REIFs), most of which have seen their share prices fall during 2022, while the FTSE-100 rose by just 0.9%. We update our publication of July 2022 and, in addition to assessing share price performances during 2022, we address the three key issues of recent months – higher inflation, extremely volatile power prices and rising interest rates.
- The stocks analysed are all members of the Association of Investment Companies (AIC). As a 31-strong group, their combined market capitalisation is currently £30.7bn. Aside from the planned IPO of AT85 Global Mid-Market Infrastructure, which is now not due to be completed until March 2023, no IIC/REIF IPOs have been undertaken since 2021.
- Within the 31-member grouping, the most valuable IICs are HICL Infrastructure and 3i Infrastructure – capitalised at £3.3bn and £3.0bn, respectively. The equivalent in the REIF sector are Greencoat UK Wind and TRIG, which are capitalised at £3.5bn and £3.2bn, respectively.
- Although many established funds have high inflation linkage, the inflation issue 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.
- As expected, the sharp rise in interest rates of late has had distinctly negative NAV implications through higher fund discount rates; not surprisingly, share price ratings have fallen as a result. Plus, while many REIFs involved in renewable generation have the benefit of rising energy prices as an offset, this feature does not generally apply to IICs (GCP Infrastructure excepted).
- Soaring gas prices have had a pronounced upward impact on long-term REIF valuations since long-term power price assumptions are a key factor – along with discount rates – in determining the NAVs of most REIFs. The NAV volatility of Foresight Solar provides a telling illustration. It reported a 27.4% increase in its NAV between March 2021 and March 2022, while its September 2022 NAV was hit by an 8.6p per share decline due to the proposed Electricity Generator Levy (EGL), although the latter was broadly offset by other factors.
- Around 50% of the REIF sector’s £16.1bn valuation is accounted for by wind power generation. Due to generous subsidies, the UK wind power sector has expanded; it now exceeds 25GW of capacity, while UK solar capacity is currently ca.15GW. The removal of subsidies for new solar plants from 2017 remains challenging, although unit costs have plummeted.
- Offshore wind power is booming. 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, while an auction in July 2022 saw a record low price of just £37.35p per MWh.
- With rising interest rates, it is no surprise that the underlying premia over NAVs have, with a few exceptions, disappeared. Even BBGI, whose premium was ca.25% for much of 2021, is now trading at a premium of just 5.1%. And 3i Infrastructure’s premium has now been substantially eroded. Shares in the two IIC digital stocks, Cordiant Digital and Digital 9, are now trading at discounts of 24.7% and 19.3%, respectively.
