The Renewables Infrastructure Group (TRIG ) has held out the prospect of share buybacks to tackle its 14% discount as the board and fund manager Infrared Capital work out the best use for its cash flows driven by inflation and power prices.

Half-year results today showed the £3.5bn portfolio of wind and solar power projects generated £264m cash in the six months to June, three times what the 6%-yielder needs to cover its quarterly dividends.

Dividends were covered 1.7 times by net cash flows, up from 1.4 times a year ago, as the investment company continued to prioritise debt reduction, repaying £119m of portfolio-level borrowing in the period.

Both the chairman Richard Morse and fund manager Richard Crawford said the priorities for its surplus cash flow were lowering the £410m drawn down on its £750m credit facility and funding the construction of two battery projects in the UK, solar plants in Spain and an offshore wind farm in Sweden.

‘Beyond this, the investment manager adopts a disciplined approach to further capital outlay, where, together with the board, it also considers share buybacks alongside potential new investments as well as disposals to generate cash for such allocations in seeking the best return for shareholders,’ Morse said.

‘Right policy’

Confirmation that TRIG was on track to hit this year’s dividend target of 7.18p per share, up from 6.84p in 2022, and that buybacks were on the agenda lifted its shares 1% to 115p.

‘This is clearly the right policy in view of the current discount and constraints on capital, albeit evidence of execution will be key,’ said Jefferies analyst Matthew Hose.

TRIG shares have fallen 10% this year in a sector-wide de-rating caused by the sharp rise in interest rates, which has put investment companies under pressure to take steps to improve investor returns.

That discount has cut TRIG’s market value to £2.8bn and left the stock trading on a 13.6% discount to net asset value (NAV) per share of 132.2p at 30 June, double the valuation gap in February when it reported its best-ever annual results.

NAV per share dipped 2.4p or 1.8% over the six-month period as a rise in inflation that added 3.5p to the valuation was more than offset by a rise in discount rates, which knocked off 5.7p, and a fall in power prices which reduced NAV by 3.5p per share.

However, also in the mix was improving or sweating the assets, which added £160m to NAV, equivalent to 6.4p per share. Operations director Chris Sweetman said making older wind turbine blades more aerodynamic had increased their power generation by 5%.

Responding largely to the rises in interest rates and government bond yields, TRIG hiked its weighted average discount rate by 0.7% to 7.9%, although the higher returns it expects in future from its battery projects were a factor in the adjustment too.

The impressive cash generation came despite electricity production of 2,954Gwh coming in 9.3% below budget because of calm weather in the UK and Ireland where onshore wind slumped 21% and 18% below budget. 

Not just a bond proxy

TRIG passed its 10th birthday last month. Over the past decade, its shareholders have received a total return of 92.5%, although underlying investment return has been 146.5%, according to Numis Securities data.  

Morse said TRIG was demonstrating its resilience through the economic cycle, underpinned by the positive inflation correlation of its revenues and low exposure of its cash flows to rising interest rates.

‘Over the next ten years, more than 50% of forecast revenues are directly linked to inflation through subsidy support mechanisms providing a natural hedge to increasing return expectations,’ he said.

Infrastructure funds’ reputation as ‘bond proxies’ has hurt them this year as investors have perceived the return of 4%-5% yields UK government bonds as more attractive. Crawford told analysts TRIG was making efforts to improve its total return by targeting capital growth through the construction of new assets, co-locating wind with solar parks and re-building or ‘repowering’ older sites.

In his presentation, he compared the 4.5% yield on a 20-year gilt with TRIG’s 7.9% discount rate, which reflects the annual return the fund expects to make on its investments. Whereas the gilt offered a 1.1% real return over the market’s forecast of 3.4% inflation, TRIG’s discount rate implied a 5.2% annual real return over the 2.7% average inflation forecast for Europe over the next two decades. 

Liberum analyst Joseph Pepper retained a ‘buy’ on TRIG. He said the NAV decline was in line with its peers, the share price discount was comparatively low and, with the portfolio conservatively managed, he was less concerned by financing costs, adding, ‘we expect it to be among the first in the peer group to raise equity (and fully repay floating rate debt) once equity markets recover.’