JLEN eyes buybacks as ‘disappointing’ discount threatens investor vote
JLEN Environmental Assets (JLEN ), the £792m diversified green energy fund, faces a continuation vote next September after its shares suffered a sharp derating this year on fears over higher-for-longer interest rates.
JLEN will celebrate its tenth anniversary next March, but in half-year results this week said it would honour a commitment to let shareholders vote on the future of the investment company at the 2024 annual general meeting if its shares traded at an average discount of more than 10% in its financial year to March 2024.
Since March this year JLEN shares have trailed an average 13% below net asset value (NAV) with the gap recently widening to 19% to the latest valuation. The stock has fallen 15.5% this year, dragging the total shareholder return over three years to 22.3%, a third of the underlying 66.6% return generated by the portfolio, according to Numis Securities figures.
Chair Ed Warner said JLEN’s board was ‘acutely aware’ of the wide discount and said it was ‘disappointing’ the shares had dropped below asset value.
Since launch in March 2014, the company has delivered a total asset return of 122.9%, or 8.8% a year including dividends which have steadily grown. It will hope that the market’s growing conviction that interest rates will start to fall next year will lead to a recovery in the alternative income fund’s stock and give investors a bigger share of the underlying returns.
Buybacks under consideration
In the meantime, Warner and his team of non-executive directors are working with Foresight Group fund managers Chris Tanner and Chris Holmes ‘to establish a clear, disciplined strategy for the allocation of capital’ at a point when the company is preventing from raising money through share issuance.
Asset disposals would be considered, he said, ‘should attractive prices be achievable’, with the priorities for any sales proceeds being around £42m of ‘existing [investment] commitments, planned follow-on investments and asset enhancements’ alongside managing debt.
Share buybacks, of which there have been none so far, would ‘form an important part of our capital allocation considerations’ given the wide discount ‘materially undervalues the company’, Warner said.
With the company constrained by how many shares it could realistically buy, Warner reassured shareholders he would ‘engage’ with them in the coming months ‘to discuss any concerns ’.
His comments came as the fund, which invests in bioenergy, anaerobic digestion and hydropower alongside wind and solar, said NAV per share had fallen 2.8% to 119.7p in the six months to 30 September, although with dividends included the portfolio was stable with a 0.3% total return.
The main factor weighing down on the 42-asset, predominantly UK portfolio was higher discount valuation rates, which rose from 8.4% in March to 8.9% in June before ending the half year at 9.4% in response to rises in interest rates and government bond yields.
Lower power price forecasts also detracted, although these were partly offset by a lower-than-expected Electricity Generator Levy payment to the government, and the company pointed out 68% of its energy contracts were fixed for this winter and 50% for next summer.
Two quarters of dividends totalling 3.78p kept JLEN on track to hit its full-year target of 7.57p, up from 7.14p last year. The payout was covered 1.3 times thanks to a ‘second consecutive period of record distributions’ helped by the inflation-linked revenues many of its assets provide. This puts the shares on a 7.8% yield, above the 7.1% average of its peer group.
Because of the high proportion of its revenues that are fixed or benefit from government subsidies, JLEN said that even if power and gas prices halved against current forecasts in the next three years, it would still expect dividend cover of at least 1.2 times. And if unhedged prices collapsed to zero, dividend cover would only fall to 0.95 times.
The renewables portfolio produced 660GWh of energy over the half year, which was 1.58% below target due to ‘unseasonably low wind speeds’ in the first quarter, but the anaerobic digestion and hydropower assets performed better than expected.
JLEN also owns three construction-stage battery storage assets in the UK and although two of the sites have seen delays due to component supply problems and grid connection delays, the third is now ‘actively trading’.
The managers said they had ‘paused’ starting construction of the two remaining battery energy storage projects given the volatility seen in that market and the board’s focus on capital allocation.
‘We will be suitably cautious in our approach given the prevailing uncertainties, but considering this is a long-term asset class, we view the future with confidence,’ said Warner who said the outlook for sustainable infrastructure remained positive as the UK and Europe decarbonised.
Analysts’ opinions were mixed. Numis’ Colette Ord said there were ‘more compelling value stories in the pure play generation funds, particularly those which have more options available to address discounts.’
Christopher Brown at JPMorgan Cazenove welcomed JLEN’s statement on capital allocation but remained ‘neutral’ on the shares due to the ‘tail refinancing risk’ on its £170m credit facility on which it has drawn £125m.
Stifel’s Iain Scouller was more upbeat, lifting his recommendation to ‘positive’ from ‘neutral’. ‘We view the 20% discount to NAV and c.8% dividend yield as attractive. Given the improving leverage position and assuming we are at “peak discount rates”, there is scope for the discount to re-rate to closer to the 10% level in the months ahead, in our view.’