The admission document accompanying Greencoat Renewables’ listing in July 2017 states that “the company has been established by the Investment Manager to give investors exposure to operational renewable energy infrastructure assets denominated in euro. The Board and the Investment Manager believe there is a significant opportunity to consolidate ownership of operational wind farms in Ireland over the short to medium term and, in due course, to diversify its portfolio through acquisitions of further renewable energy infrastructure assets in Other Relevant Countries”.
Cashflow and resultant distributions would be a central plank of the investment case. From the same document: “Over a long term horizon, the Company’s aim is to provide investors with an annual dividend per Ordinary Share that increases progressively while growing the capital value of its investment portfolio. The Company is targeting an annualised dividend of €0.06 per Ordinary Share from Admission”.
The admission price was €1.00, so a strong initial annualised dividend yield of 6.00% (off the IPO price) was targeted. The Group raised €264.6m in net proceeds from the IPO, which gave the Group a share count of 270m shares on admission. Reflecting buoyant investor demand for renewable assets, the Group has conducted several follow-on capital raises at attractive (>NAV) levels, which mean that while the share count has climbed to 1.1bn shares, the NAV per share has grown to 110.1c (as at end-September 2022) notwithstanding the €166.5m paid out in dividends from admission to end-June 2022. The per-share dividend has grown too – GRP is targeting a dividend payout of 6.18c/share in the current financial year.
GRP’s installed base has grown from 137MW, comprising two assets (windfarms in the South of Ireland) in March 2017 to 32 assets, along with an 11MW co-located battery storage project, with an aggregate net installed capacity of 1,095MW as at end-June 2022.
The Group has expanded beyond its home market of Ireland, with in-place wind farms in France, Germany, Spain, Finland and Sweden. It has also expanded beyond wind, moving into the aforementioned battery storage space and it has also agreed to acquire solar assets in Spain and Ireland.
At the end of June GRP had forward purchasing agreements to add 330MW to its platform, which will grow capacity to 1,426MW by the end of 2023.
This diversification has clear benefits. At the simplest level, the wind doesn’t always blow in Ireland, so having a geographic spread of assets makes sense. Given that this is a highly regulated space, it also makes sense to be exposed to different jurisdictions to mitigate risks from any adverse regulatory or tax changes. Battery storage has obvious structural growth characteristics as grids adapt to higher weightings of renewable capacity, while adding solar expertise further augments what I suspect is GRP’s attraction to developers as a ‘preferred bidder’ (strongly capitalised, proven track record of M&A) for European renewable assets.
In October the Group held an EGM to refine its investment policy. In summary, GRP’s growth framework is now: (i) To invest in operational renewable electricity generation assets in ‘relevant countries’ (Ireland, Belgium, Finland, France, Germany, Netherlands, Denmark, Norway, Sweden, Spain and Portugal) “where the Board and the Investment Manager believe there is a stable and robust renewable energy policy framework”; (ii) To achieve diversification through investing across a number of geographies and renewable energy technologies; (iii) Openness to owning 100% or less of individual assets; (iv) To use third parties to operate these assets; (v) To cap single investments at less than 30% of GRP’s Gross Asset Value; and (vi) To limit Aggregate Group Debt to 60% of Gross Asset Value (with 40% expected as the typical medium-to-longer term level).
I mentioned earlier the risks for operators of generating assets arising from regulatory or taxation changes. At the end of June approximately 70% of GRP’s portfolio cashflows were underpinned by government support mechanisms with underlying contracted tariffs that are inflation-linked to 2032. Clearly, the cost of living crisis is at the top of the political agenda in all of GRP’s end-markets. I don’t have a crystal ball, but there is plainly a risk that policymakers target the beneficiaries of increased energy prices.
Three important counters to this view are: (i) The decarbonisation agenda isn’t going to go away, so hammering renewable electricity generators isn’t going to attract the billions in investment needed to deliver it; (ii) the market appears to foresee a normalisation in electricity prices, with consensus revenue for GRP in 2023 (€175m) and 2024 (€163m) below the expected 2022 outturn of €216m, notwithstanding the strong growth in GRP’s installed capacity over the next 12 months or so; and (iii) expected annual dividends over 2022-2025 are covered by between 1.3x and 1.9x by expected statutory earnings (and presumably more by expected operating cashflows when you add back the non-cash depreciation charge).
On 1 November GRP released an end-September NAV and dividend update.
From a balance sheet standpoint, the key points are aggregate group debt of €847.5m; Gross Asset Value of €2.1bn (giving a debt / GAV ratio of 40%, in-line with medium-to-long term guidance); and a NAV of 110.1c. The Group’s debt is 100% fixed rate, with a blended rate of just 2.2%.
This NAV was flat on the end-June outturn (also 110.1c) with the moving parts during Q3 being a 5c tailwind from power price and short-term inflation assumptions offset by a 5c hit from an increased discount rate of 6.7% (on an unlevered basis), reflecting the market environment.
How do I view GRP here?
As I said earlier, the decarbonisation agenda isn’t going to go away. Don’t get me wrong – I believe that there will also be a place for non-renewable assets for a long time to come, but the economics of modern renewable assets (essentially zero marginal cost, and this is before taking externalities such as pollution into account) are very attractive. GRP has established itself as a leading owner of European renewable assets, with a clear appetite to do more. Its installed asset base has grown tenfold from 137MW in early 2017 to an expected 1,400MW+ by the end of next year.
Investible assets will continue to grow over time and, by extension, this will see a continued flow of money into the renewable space (on top of that, we are presumably likely to see asset managers being mandated to allocate more to this sector). If GRP continues to trade at/above NAV, I think it’s fair to assume that it can execute on further capital raisings and grow its capacity, with all that this means for future cash flow generation (and dividends). Sure, the nominal cost of borrowing has gone up, but in real terms debt is still cheap.
How does the market view GRP?
On Friday 4 November GRP closed at €1.14 in Dublin (its shares are listed on Euronext Dublin and on the AIM in London). The Dividend Discount Model holds that P = D1 / (r-g), where P = the current share price; D1 = the value of dividends at the end of the first period; r = the cost of equity for the company; and g = the expected constant growth rate in perpetuity expected for the dividends.
We already know that the share price is €1.14 and that GRP will pay a dividend of 6.18c for the current financial year. For g, I think it is fair to assume that GRP’s income will, all else being equal, track expected inflation. Most of GRP’s assets are located in the Eurozone, where the ECB’s mandate is to maintain price stability, which the ECB defines as 2% inflation over the medium term.
We can then update the Dividend Discount Model from P = D1 / (r-g) to €1.14 = 6.18c / (r – 2%) and use this to solve for the cost of equity that is currently being priced in by the market. This shows that the market is currently pricing in a COE of 7.42% for Greencoat, which feels a bit like Goldilocks (not too hot and not too cold) to me.
Data from Marketscreener suggest that the average price target for the 8 analysts who follow GRP is €1.37, with a range of €1.26 – €1.50. I suspect many of those targets were set before the recent spike in interest rates, which has pumped up the risk free rate. By this I mean that the €1.26 low end of the sell side price target range provides a dividend yield of 4.9% (off the 6.18c/share targeted for this year) while the high (€1.50) end pays you a 4.1% yield. At Friday’s closing price of €1.14 the dividend yield on GRP is 5.4%.
By way of comparison, the Irish 10 year yield is 2.8%, the UK 10 year is 3.5% and the US 10 year is 4.1%. The Stoxx 600 is on a trailing 12 month yield of 3.1%. Plainly, investors are not going to bid GRP up to silly levels if they can pick up similar risk free / less risky cashflows elsewhere.
But at 5.4%, nearly double the Irish 10 year yield and 1.7x the trailing yield on the Stoxx 600, the yield on GRP here certainly looks attractive. Furthermore, and acknowledging: (i) policy risks arising from the inflationary backdrop; and (ii) likely higher future borrowing costs, the growth to come from forward-purchase agreements to acquire energy assets and beyond (GRP guides that it has >€0.4bn of investment capacity post the closing of the forward-purchase agreements gives me comfort that GRP can grow its distributions from the current level.
Overall, I like Greencoat Renewables and am a happy shareholder.
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