SMALL CAP IDEAS: Greencoat UK Wind delivers on its objectives with pipeline of opportunities
We last sat down with Stephen Lilley of Greencoat UK Wind shortly after the company's stock market listing in March 2013.
In the four years since, the infrastructure fund, which invests in wind farms, has delivered on its objectives – and then some.
For those who got in at float the total shareholder return (capital appreciation plus dividends) has been an impressive 53 per cent as the company has grown to market capitalisation of £920mln.
Benefits: Renewable energy can reap great rewards from higher-than-expected energy prices
In that time it has gone from six to twenty assets using a mix of debt and equity to build a mainly onshore portfolio.
A generating capacity of 436 megawatts (up from 127 megawatts at float) is enough to power 400,000 homes - the equivalent of Lilley's home city of Leeds.
Greencoat has been sensible in its approach to developing the portfolio.
For instance, it spends a great deal of time measuring the output from the assets before they are acquired as it knows even minor under-performance can be costly over the long-term if you own a lot of wind turbines. A simple thing, but not everyone is this rigorous.
Similarly, its hands-on approach means Greencoat has fewer outages than many of its rivals.
All of this created a company that delivers steady dividend stream – at the last results it was 6.34p, representing a yield of 5 per cent at the current share price.
The payout is also designed to track the retail price index and the target for 2017 is 6.49p.
The industry fundamentals, meanwhile, remain very supportive. Green subsidies are here for the long-term and the regulatory environment is better understood by investors than it was at the time of IPO, CEO Lilley says.
The pipeline of opportunities is such the company can be very picky, acquiring the assets deliver high internal rates of return.
In other words it won't do a deal just for the sake of it and its track record bears this out.
'We have a big market and buy steadily, or not if there's no value,' says Lilley.
Unscathed: Greencoat has been untroubled by Brexit
The last results reveal the company net asset value increased by 4.1p a share in 2016, so this is a slow burn, rather than being at the sex and violence end of the investment scale.
Lilley calls the business itself 'simple, straightforward and transparent'. Greencoat has been untroubled by Brexit and survived unscathed the downturn in energy prices (which have ticked back up of late).
This may explain the upsurge in institutional demand for the shares – although may be a further reason for their popularity.
In short, investing renewable energy is fast emerging a go-to hedge against inflation.
Why so?
The inflation hedge attributes of green energy stocks has resonance with certain investors
Governments support for the 'renewables' industry often comes in the form of long-term electricity price guarantees usually linked to the cost of living.
At the same time the price of electricity tends to adjust rapidly to inflationary pressure.
'With zero-cost inputs, renewable energy can additionally reap great rewards from higher-than-expected energy prices,' says analyst Nick Brugman, of French bank BNP Paribas, in a White Paper on the industry.
Lilley's real-world experience suggests the inflation hedge attributes of green energy stocks has resonance with certain investors.
The shares, up 16 per cent in the past year, are now trading at a 15 per cent premium to the company's last published net asset value.
Investors new to the stock might question whether that premium to NAV is sustainable.
But does the asset value tell the whole story? This is after all a share prized not just for its capital growth, but the income it produces, which is linked to RPI.
Certainly, the institutions like the story. The last fundraiser, in November, was significantly over-subscribed and you get the feeling the big funds will turf over more cash as and when needed.
The company's broker, RBC Capital believes, the shares are worth 125p - on a 'normal course of business' basis.
The 'upside' target of 135p essentially relies on a £2 per megawatt-hour rise in the price of electricity. The 'downside' valuation is 105p and factors in the electricity price falling by the same amount.
Neither valuation is either sexy or scary. Lilley uses the parable of the tortoise and the hare to sum up the investment proposition.
'If you repeatedly do the right thing you win the race,' he says.
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