GRID claims to be ‘turning a corner’ in three-year recovery plan
Gresham House Energy Storage (GRID ) chair John Leggate has said the UK battery sector is ‘turning a corner’ in an update detailing the investment trust’s three-year plan to restore the dividend and rerate its highly discounted shares.
Not only were revenues slowly recovering, he said, the market backdrop had also improved with a government committed to using battery storage to help the UK reach net zero, while the upgraded balancing mechanism meant there are more opportunity for batteries.
In an effort to reassure the market that its earnings base will be less volatile, GRID has slashed counterparty risk with the National Grid operator by reducing exposure to merchant revenues by half, Leggate said.
The chairman added that the board had begun the process of refinancing debt so that interest costs would be repaid with contracted revenues rather than with the more volatile revenues from buying and selling energy.
After a ‘considered view of the outlook’ for the coming three years, Leggate said the board and Gresham House fund manager Ben Guest were ‘feeling more confident of delivering growth for the company and re-instating the ability of the company to pay covered dividends during 2025.’
Extended portfolio duration
Instead of building new battery assets, GRID plans to extend the duration of its one-hour batteries to four hours. This will be funded with co-investments from third parties at asset value, which will also validate the valuations of the portfolio, it said.
GRID is in talks with an investor to extend the duration of the 50-megawatt Kent-based Glassenbury asset, which it acquired in 2019, and hopes to complete in the first quarter of 2025.
Reinstating the dividend
The board said the higher proportion of contracted revenues would significantly reduce the risk of unexpected drops in earnings and provide a more stable platform for dividends.
It said investors could expect to see more arrangements, such as the battery deal agreed with Octopus Energy earlier this year.
Assuming it manages to refinance the debt with amortisation, the board expects it will pay out the first dividend in the second quarter of 2025. In future it is planning three smaller quarterly payments and a larger final dividend.
After rising strongly before and after the capital markets day on Wednesday, the shares dropped today to close the week up 1.5% at 48p.
A lot of work to do
Deutsche Numis analyst Andrew Rees welcomed the forward guidance but said it depended on a successful refinancing, ‘which remains a key milestone for the company’.
‘At this point in the business plan the shares remain only for the brave. Some may be attracted to the 52% discount but we note more stable infrastructure cashflows with inflation protection are on offer from other
segments of the listed infrastructure market and provide more compelling riskadjusted returns.’
Stifel’s Sachin Saggar noted that the key issue for battery funds was that they built their portfolios at a much more expensive time, meaning building more, or ‘doubling down’, would be the best way to rerate the shares.
He added that the sector was also hanging on the fate of rival Harmony Energy Income’s (HEIT ) portfolio sale at or above asset value.
‘Frankly, what happens with Harmony is more important to GRID. A sale of a 2hr asset at £750k per MW or less will heap pressure on the board and manager given their defence of valuations,’ he said.
