Downing Renewables & Infrastructure (DORE ) has hiked this year’s dividend target by 7.8% after its portfolio of hydropower, wind, solar and newly-acquired non-generating assets easily covered the 2023 payout.

In the face of falling power prices, fund manager Tom Williams derisked the £132m portfolio by moving away from energy-generating assets to strengthen the visibility of long-term revenues and provide the comfort to increase the dividend, with 47% of revenues fixed for the next decade.

Annual results showed the 5.38p dividends paid out in 2023 were covered by cash revenues 1.21 times. The new target offers a 7.8% yield and should be covered by an even better 1.35 times, the Downing manager believes.

Over the 12 months to 31 December, Williams bought an £11m shunt reactor based off Merseyside, which helps to regulate the flow of electricity on the power grid. The asset is paid for remaining available, providing DORE with a long-term fixed contract unaffected by power prices.

The other non-generating asset was a £7m Swedish electricity distribution network Blasjon, which owns the wires connecting homes to electricity generators, also providing long-term defensive revenues, with the pair making up 6.5% of the portfolio’s annual income.

Other assets acquired over the period included a £13m portfolio of operational rooftop solar panels in the UK and nine hydropower plants totalling £16m, including the first investment in Iceland, with assets also held in Sweden and Northern Ireland.

‘We were fortunate that to have several years of dramatically rising power prices, but that wasn’t going to last forever. While prices were high, we started looking for assets that would not have exposure to power prices so that when they did start to come down, we would be able to have a backbone of fixed revenues,’ Williams (pictured) told Citywire.

Over the year, the net asset value of the portfolio fell 3.1% to 117.7p per share, as power prices and inflation dropped, while the discount valuation rate remained at 7.7%. Total returns including the dividend were 3.5%.

With the shares languishing at a 36% discount below NAV, the board chaired by Hugh Little bought back £6.2m of stock since the beginning of 2023.

With cash and a credit facility of up to £15m, DORE had options but it was hard finding an investment to beat the 14% return delivered from buybacks.

Williams said hydropower assets could be the exception. Hydro plants sell power when prices are high, ensuring all power sold is at a premium to the baseload price, unlike wind or solar assets, which generate energy at the same time. They make up 44% of gross assets, with plants spread across Sweden and Iceland.

Not only that, but cheap investment in the form of software and hardware upgrades opens up a new revenue stream from frequency containment reserve (FCR) markets in Sweden, where it would fill gaps in demand and supply, adding as much as 5% to their overall value over time.

‘We’ve been focused on buying assets that are a bit unloved and operating in one way, bringing them into the portfolio, getting efficiencies of scale and then making operational changes to realise real value for our shareholders,’ he said.

Given the shares are trading well below par, the fund cannot raise cash through the public market, so Downing is considering finding a co-investor for the Swedish hydro portfolio, which totals 20 assets, validating the NAV and helping also to drive a rerating in the shares.

Williams said they could sell other assets to generate more cash, but solar in the UK is pretty well marked to market already.

Debt stands at 40% of gross asset value, costing 5%-6%, Williams said, pointing out that they could use excess cash to pay it off within two years, but the cash was better used investing in hydropower.

Deutsche Numis analyst Colette Ord said the addition of the non-generating assets was a point of difference versus peers and highlighted both the breadth of DORE’s mandate and focus on diversification of both technology and revenue stream.

She added that the 36% discount was 16% below its sector peers, ‘which in-part reflects the fund being viewed as sub-scale’.