JLEN Environment Assets (JLEN ) has surprised analysts by flagging up a record first-quarter gain that surpassed their already elevated expectations for the currently buoyant renewables infrastructure funds sector.

Shares in the £794m diversified investment company, which includes onshore wind, solar, waste processing, hydroelectric power and battery storage in its portfolio, bucked the stock market slump yesterday, jumping 5% on news it expected to declare a 13%-15% uplift in net asset value (NAV) for the first three months of the year.

Mick Gilligan of wealth manager Killik & Co called the first-quarter increase, the biggest in the company’s eight-year history, a ‘blow-out’ number that was significantly ahead of rivals.

Stifel’s Iain Scouller said: ‘We think this would probably be the largest quarterly percentage increase delivered by any of the renewables funds since their inception.’ He maintained a ‘positive’ stance on JLEN, which at 120p stands at a small premium of around 2% to the upgraded NAV, and said it offered a ‘positive read across’ to other funds in the 24-strong sector that had yet to report.

Although still subject to independent valuation, the uplift should take JLEN’s NAV per share from 100.7p on 31 December to 113.79p to 115.8p. Including a quarterly dividend of 1.7p that produces a total return of 14.7% to 16.7%.

Expectations for JLEN, a Guernsey closed-end fund managed by Chris Tanner and Chris Holmes at Foresight Group, were already high after several London-listed renewables funds, such as stablemate Foresight Solar (FSFL ) and Greencoat UK Wind (UKW ), posted forecast-beating first-quarter returns of around 8% and 12% earlier this month. 

Like them, JLEN said its NAV had been driven higher mainly by short-term power price rises and the spike in the rate of inflation, which in the UK hit a 30-year high of 7% last month, but also by up-rating the valuations of recently constructed projects.

However, there was some mystification as to how the 5.7%-yielder could benefit significantly from rising power prices as JLEN fixes the price of more than three-quarters of the power generated by its portfolio. 

Some analysts wondered if the company had lowered the discount rate, with which alternative income funds like JLEN value the present value of their cash flows, to produce such a jump in NAV.

‘Trusts like JLEN receive a series of future income streams because of contracts they have entered,’ explained Gilligan. ‘The valuation process of this investment involves estimating the future cash flows and then “discounting” them to arrive at a current value. 

‘The discount rate used is crucial to the current value and is largely a reflection of predictability and risk. Think of the discount rate as the level of “compensation” that you would need for taking on the risk of the investment. Lots of risk equals a high discount rate. Very little risk a low discount rate,’ he said.

Colette Ord of Numis Securities believed a change in JLEN’s 3% inflation assumption was more likely, following moves by UK Wind, Bluefield Solar Income (BSIF ) and Foresight Solar to bump up their forecast for this year to 8%, 6.4% and 5% respectively.

‘Based on the business model, it would be more logical to assume that the uplift is biased towards a change in the inflation assumption given that at 30 September portfolio revenues were 71% inflation-linked,’ said Ord in a note to investors.

‘As a result, we view the forward guidance, without the additional colour on earnings and portfolio versus market-specific drivers as little help in assessing the extent to which the uplift is embedded or temporary in nature,’ Ord said.

Christopher Brown of JPMorgan Cazenove agreed inflation was responsible but said moving newly-built assets from a high-risk construction cost valuation to the normal discounted cash flow (DCF) method ‘is likely to have been a significant contributor in our view.’ 

He also pointed out JLEN had two standalone battery energy storage assets in Scotland and Southern England which ‘may have been eligible to enter the recent capacity market auctions which cleared at record prices, something Gresham House Energy Storage (GRID ) benefited from, although we don’t know if JLEN participated in those auctions.’

JLEN has generated a 45% total return to shareholders over five years. According to Brown, after yesterday’s update, it has the second-highest ‘steady state’ annual return in the sector of 5.2%, which he calculates by normalising inflation assumptions across the sector and taking into account the discount rates used by individual funds.