Shares in Gore Street Energy Storage (GSF ) derated further on Thursday after the oldest battery fund failed to provide further clarity on its future earnings growth and dividend cover in a trading update.

Announcing the two-week energisation process of its 79.9 megawatt (MW) Stony asset in Milton Keynes beginning at the end of this month (which will bring the total operational portfolio to 371.5MW), the update made no mention of its 50MW Ferrymuir asset in Scotland, which was due to connect in the second quarter.

On a tough day for the UK stock market, the shares fell 4% from 93.6p to 89.8p, closing on a 22% discount to net asset value. Over five years the shares have generated a total return of 23%.

The £449m portfolio once again stressed the advantage of its international spread with assets in Ireland, Germany and the US, ‘which has proved fruitful since [GSF’s initial public offering] five years ago’ as the UK market has become saturated, leading to a decline in revenue, said Alex O’Cinneide, chief executive of investment manager Gore Street Capital.

He said GSF was currently benefiting from access to 19 revenue streams across four uncorrelated markets, with assets in the US states of Texas and California receiving a boost from the positive legislative environment set by the Inflation Reduction Act (IRA).

Under the IRA, a basic tax credit of 30% is available, and additional investment tax credits can be obtained based on specific requirements. Its assets Dogfish, Wichita Falls, and Mineral Wells (combined 95MW) all qualify for 40% ITC, provided that unemployment rates in these regions remain equal to or higher than the national average.

This additional 10% ITC adder has yet to be factored into the assets’ underwriting and represents a significant potential upside for shareholders.

Another positive in the US is the shorter timeline in getting construction assets energised while the UK faces increasing grid connection bottlenecks. Such is the attraction of the US that its larger rival Gresham House Energy Storage (GRID ) recently raised £50m to fund its expansion to the Californian market.

GSF’s UK assets generated an average revenue of £7.62 per MW hour for the six-month period to June this year, beating the national average of £6.83 per MW/hr, according to data from battery storage specialist Modo Energy.

Its figures showed that two-hour-duration batteries in the UK generated on average just 7.6% more than GSF’s one-hour-duration portfolio, making the increased costs of building them not worthwhile.

Numis analyst Andrew Rees noted that the data reflects the lower intraday spreads in GB power prices in 2023 presenting less opportunity for longer duration assets to earn higher arbitrage, or trading, revenues, but disputed the fact that one-hour duration was ‘optimal’ as the capex requirement of a two-hour duration is less on a £/MWh basis than one-hour assets.

Stifel analyst Sachin Saggar said that he was more concerned about the potential for future revenues and that one-hour batteries will see flat to declining revenues from this already low point, with two-hour batteries having much greater potential to see revenues increase to attractive levels. He added that with equity markets closed, GSF would not be able to upgrade its one-hour assets to gain access to capture these revenues.

Both analysts are looking for annual results later this month to provide more information. 

Liberum’s Joseph Pepper was more positive on the Citywire award winner. Having upgraded the 8%-yielder to ‘buy’ on a 113p price target last month, the analyst was pleased by GSF’s growing US exposure, reduced cash drag and increased discount rate to 10.1% from 8.3% to reflect the downward pressure on valuations from rising interest rates.

‘We now view the compelling discount to NAV as an attractive entry point with shares falling 16% year to date,’ Pepper said in a note to investors.

Performance since launch 

Source: Morningstar