Investors have jumped at the buying opportunity Citywire flagged in Renewables Infrastructure Group (TRIG ) last week after the £3.5bn investment company posted record half-year results and highlighted a strengthening dividend and returns that look set to rise further with inflation.
TRIG dropped into the ‘cheap’ list of our Trust Watch report last Friday after the highly rated income fund saw its share price premium fall to a modest 1% after pre-releasing an impressive 12.5% return for the six months to 30 June, driven by surging power prices and soaring inflation.
Today the shares rose 3.7% to 143.8p, putting the closed-end fund on a 7% premium to its 134.2p net asset value (NAV) per share at the end of June. That’s more expensive than a week ago but still below its 11.6% average premium of the past year.
The 4.9%-yielder pleased income investors by reiterating its 6.84p per share dividend target for this year and saying its quarterly payments had been covered 1.39 times by the surge in revenues in the first half. This is an improvement on the 1.28 times earnings over a year ago.
What got analysts excited however was the company’s surprisingly low inflation assumptions for next year and beyond. While the company hiked its forecast for both the retail price (RPI) and consumer price (CPI) indices this year to 10.3% and 8.4%, respectively, up from 3.75% and 3%, it left its numbers for next year unchanged at 3.5% and 2.75%, and stuck at 2.75% and 2% for 2024-2025.
That looked incredibly conservative given the Bank of England’s dire warning yesterday as it hiked interest rates by 0.5 percentage points that inflation could hit 13% by the end of this year and remain above 10% for 2023.
Like other renewable energy funds such as JLEN Environmental (JLEN ) and Greencoat UK Wind (UKW ), TRIG returns are heavily linked to changes in the cost of living. Half of its forecast revenues for the next 10 years are directly linked to inflation through government subsidies, such as the UK’s contract for differences (Cfd) incentive, to which it gained further exposure by buying a stake in the Hornsea One offshore wind farm in March.
Most of its other revenues that come from selling electricity into the wholesale market are also indirectly linked to inflation due to the inclusion of energy costs in the official inflation measures.
‘The UK RPI inflation assumption for 2023 is 3.5%, falling to 2.7% between 2024 and 2029, which appears low and may be a source of further gains in the next year, said Stifel analyst Iain Scouller, who retained his ‘positive’ rating.
Liberum’s Conor Finn said TRIG’s ‘prudent’ assumptions left scope for further gains in the second half of the year.
‘With respect to TRIG’s UK portfolio, we note that Bloomberg’s latest consensus UK RPI estimate for 2022 is 10.9%. Based on TRIG’s sensitivity analysis, we note that a 3% increase in annual inflation applied over the next 12 months would have a 2% impact on NAV per share.’
Richard Crawford, TRIG’s fund manager at InfraRed Capital Partners, who has overseen a 67% total return to shareholders over five years, said: ‘Amid a challenging wider market for investors, TRIG’s portfolio continues to perform well and is benefiting from its defensive positioning against elevated levels of inflation and volatile commodity markets.’
Crawford indicated that a rise in this year’s dividend target was not a prospect as TRIG looks to maintain sustainable increases in payouts over the long term. He said investors want to see the company reinvest more of its cashflows and self-fund acquisitions such as Hornsea and the Twin Peaks wind farm it is helping to build in Sweden.
With the risk not fully removed of a future Conservative leader imposing a windfall tax on energy providers, including renewable generators, TRIG was anxious to stress its green credentials and support for the UK economy.
It pointed out its portfolio of 85 wind, solar and battery storage projects could power 1.7m homes with clean energy. It said it had invested £442m this year in new projects, with 75% deployed in the UK, money that could be at risk if a levy was introduced.
‘This is clean energy, and that’s what we need, and energy security,’ said Crawford.
With the government looking at how to reform the electricity market, InfraRed has said it is open to the idea of decoupling household bills from volatile gas prices. Crawford suggested an extension of the Cfd regime could be a ‘sensible proposition’ for investors and consumers by smoothing out electricity prices.
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