Update: Gore Street Energy Storage (GSF ) shares have rallied after the battery fund reaffirmed its 7% dividend target and said its payout was fully covered by earnings in the last quarter.

Having seen its shares slide last week in response to dividend cuts by Gresham House Energy Storage (GRID ) and Harmony Energy Income (HEIT ), the company this morning reassured investors that it intended to maintain its policy of distributing 7% of net assets a year in dividends.

The dividend cuts followed a note by an analyst at GRID’s broker Jefferies highlighting the zero or near-zero dividend cover at Harmony and Gresham House following a slump in UK earnings.

Analyst Matthew Hose said Gore Street’s payouts were also uncovered, but to a lesser extent, estimating 0.5% cover for the financial year to 31 March with a slight improvement to 0.6% in the current fourth quarter.

This was confirmed by the company today which said it generated ‘healthy operational cash flow and fully covered its dividend during the last reported [third] quarter’.

Alex O’Cinneide, chief executive of Gore Street Capital, the fund’s manager, told Citywire full dividend over the quarter to October was a result of record-breaking performance from its three assets in Texas, which were well ahead of expectations as the result of an August heatwave causing a surge in air conditioning usage, rather than any additional capacity coming online.

He confirmed the fourth quarter dividend would not be covered.

Although GSF’s more international portfolio is less exposed to the UK than its two listed rivals, there has been speculation that it might have to amend its dividend policy in light of the volatile earnings battery funds have experienced.

Paula Travesso, a principal at Gore Street Capital, said linking dividends to cash generation could be more efficient, but added that as the portfolio has performed as expected, the board was comfortable with the level of dividends and anticipated increased cover as assets come online.

GB market

The decline in revenue across the Great Britain market, which excludes Northern Ireland, was the natural outcome of a large increase in operational capacity in one market and was reflected in the fund’s NAV, O’Cinneide said.

Reflecting this, the fund has previously said it intends to double the size of its operational fleet to 800 megawatts in 2024, at which point the US assets will account for 55% of total operational capacity, while GB will slip from 53% to 29%.

Recent half-year results showed just how low GB revenues have fallen relative to other global jurisdictions, with the total portfolio generating £15.1 per megawatt hours in the six months to October, while the GB assets generated £6.1 per megawatt hours.

O’Cinneide pointed out the large chunks of contracted revenue streams outside GB, with over 50% of revenues for the California-based Big Rock project fixed for 12 years.

‘Not only does our diversification lower volatility among short duration contracts, we also add other things to the mix, which is unavailable to us in the GB market. We have five uncorrelated energy systems, many different revenue streams available to individual assets, so a very large picture of multiple different ways for us to make money and therefore also multiple different ways for us to balance out a steady stream of income,’ he said.

He added that over two to five years it was clear where cash flow should be coming from to fully pay back the assets and a long cash yield.

Balance sheet

In the stock exchange update, chair Patrick Cox said GSF had low levels of debt relative to its peers, with £66m in cash and $44.2m (£35m) undrawn on a $60m facility secured on its Big Rock asset in California. There also remains an undrawn revolving credit facility of £50m.

While the cash is all allocated to construction projects, O’Cinneide emphasised that GSF doesn’t commit more than it has in cash to developments.

He added that there was no rush to sell any assets, but the investment company could sell one of its GB batteries to recycle cash into a more attractive overseas market. In addition to Ireland and US, it also operates in Germany.

In early trading, GSF shares jumped 9.25%, or 6.3p, to 74.6p, reducing their decline this year to 15%. They later settled back at 71.3p, up 4.4% on the day. The company closed last week on a wide 39% discount to net asset value (NAV).

GRID added 2p, or 4.3%, to 49.9p after its 56% crash this year left its shares on a 67% discount on Friday. HEIT, viewed as a bid target by its broker, rose 1.3% to 38.4p. Its shares have tumbled 52% this year and also trail NAV by 67%.

O’Cinneide said GSF would continue to roll out the portfolio in multiple markets, capturing a diverse revenue stream with low volatility, which should narrow the discount at some point.

Tempting, but clarity needed

Liberum’s Alex O’Hanlon, who last week said all three listed battery funds were ‘a buying opportunity’, retained a ‘buy’ on GSF with a 113p price target, pointing to the doubling in operational capacity this year, the growing US exposure, as well as the recent investment by strategic partner Nidec, which will build, operate and maintain several assets.

Deutsche Numis analyst Colette Ord said that while the wide share price discounts were tempting, particularly given the importance of battery storage assets in the energy transition, investors would want greater clarity over dividends and evidence of an improvement in revenue before adding to the sector.

In addition to the impact on earnings and dividends, the weak revenue environment will likely result in third party forecasters lowering their future revenue curves which, all else equal, would reduce NAVs, she said.