Gore Street Energy slides as activist tries to pull the plug on board

Shares in Gore Street Energy Storage (GSF ) have tumbled after RM Funds turned activist and made moves to oust the board.

The portfolio of battery storage projects, which has also announced lower dividends as part of a new payout policy, slid 7.5% to 59p. This happened as RM Funds, the second largest shareholder with a 5% stake, requisitioned the trust ‘to consider resolutions pertaining to changes in the composition of the board’. 

RM is seeking to replace two directors. ‘This follows sustained underperformance, a prolonged share price discount, and ongoing concerns regarding governance and strategic direction,’ said the firm, which specialises in income funds. 

The GSF board, which is chaired by Patrick Cox, said: ‘The board is committed to acting in the best interests of all shareholders and is carefully evaluating the requisition. The board firmly believes in the strength of the company and its governance, and will continue to focus on delivering positive total shareholder returns for all its investors.’

The requisition comes on the same day as GSF reported disappointing full year results. In the year to end of March the net asset value (NAV) dropped 4% to 102.8p, with the 4p dividend and 3p special dividend saving the NAV total return, which stood at 1.1% for the year. However, investors may not be able to rely on the dividend going forward. The trust has already announced it is moving its fixed dividend target, and dividend cover for the year was just 0.76 times.

The new dividend target, which will now be linked to cashflow, is 0.75p per share, starting from the current quarter. 

Peel Hunt analyst Markuz Jaffe noted that the fund has not paid a covered dividend in any financial year since it was launched in mid-2018, and the cost of topping up the dividend from capital totals £65m since launch.

‘Not only is this a potentially misleading and tax inefficient way of returning capital to investors, it is also monies that could have been used to invest in the portfolio, improving cash generation capabilities, and potentially better positioning GSF to pay higher dividends today, all else equal,’ he said.

The company doubled its operational capacity to nearly 1 gigawatt hour (GWh) over the period, in what manager and chief executive of Gore Street Capital Alex O’Cinneide said was a ‘landmark year’, and offloaded US tax credits linked to its Californian ‘Big Rock’ and Texan ‘Dogfish’ projects for slightly more than expected. GSF also secured guaranteed contracted revenue of $14m per year. 

In that light, O’Cinneide told Citywire that GSF had achieved its key goals for the year and had a portfolio with high levels of diversification and revenue that is still paying dividends. 

‘Do I think that the share price is reflective of that? Absolutely I do not. Am I a personally large holder of these shares? Yes I am,’ he said.

The Gore Street CEO declined to comment on RM’s requisition but said: ‘In these kinds of markets we do see opportunistic people who are looking after their own interests.’ 

Writing in the annual report, chair Cox said it had been ‘a challenging year’ which led the board into ‘extensive one-to-one discussions with shareholders’ and subsequently changes to dividends, debt and cost reduction.

A review of the strategy was also kickstarted this year to address the ‘persistent’ discount to NAV – closing at 36.8% yesterday. This will look at opportunities for M&A, debt repayment and growth options, including ‘the rationalisation of the asset base to free up capital to pursue asset enhancement as well as further build out of the pipeline’. The review was supported by an independent adviser called Alexa Capital. 

‘The review looked at opportunities to optimise trading as well as alternative revenue structures such as cap and floor or tolling contracts,’ said O’Cinneide in the results.

‘This process is ongoing but preliminary results identify several actionable opportunities.’

This includes upgrades to three UK sites with additional capacity from one-hour to two-hours.

Joint ventures will also be considered as a way to get the 495MW of pre-construction assets in the portfolio off the ground. 

Jaffe said he was ‘concerned by what, if any, other issues might be uncovered’ by the review, and noted the fund uses ‘materially lower discount rates than its comparable peer group’.

‘Whilst the requisition notice may apply further pressure on the board to take decisive action to address the company’s challenges and persistent share price discount, we note that an asset or portfolio sale process is unlikely to be quick,’ he added.

‘Project augmentation is likely to be a necessary condition for several assets to achieve reasonable value through a sales process, given the superior revenue generation capabilities that two-hour assets now have relative to one-hour.’

‘Energy storage is booming’

In an interview with Citywire following the results, O’Cinneide addressed Peel Hunt’s criticisms. In response to questions about the discount rate – used to estimate the value of the portfolio based on future cashflows – he countered that the portfolio’s revenue generation is stronger than many peers. 

According to the results, average revenue for the year was £9.85 per MW/hour, equal to £86,000 per MW/year.

In terms of potential asset sales, O’Cinneide said there was ‘no active process at this point’, but that they were regularly talking to the market about possible opportunities, whether with strategic buyers or larger investors

‘It’s an interesting thing that on the ground energy storage is booming. People are building assets in multiple markets. It’s this critical asset class. There is a disconnect into the public markets. That disconnect, I believe it will close,’ said the manager. 

GSF’s rival Gresham House Energy Storage (GRID ) has seen more benefit in share price terms from the read-across from the sale of Harmony Energy Income, at close to NAV, given that both have entirely UK-based portfolios. 

O’Cinneide said there could be a helpful read-across to Gore Street as they lengthen the duration of their UK assets.

‘Our job as the manager is just to increase revenues and lower costs, and be able to deliver a sustainably good dividend for the risk that is in the portfolio. And we think we’re there,’ he said. 

Including dividends reinvested, Gore Street shareholders are down 32.3% over three years versus the 45.1% loss for GRID shareholders and the 16.5% average decline in the Association of Investment Companies’ Renewable Energy Infrastructure sector.