The East Ayrshire town of Dalmellington has been known down the years for its coal mining, curling and weaving activities. From 2023 it may be more famous for the 50-turbine wind farm that will loom over the countryside a few miles down the road.
This new 240MW South Kyle facility will be built and run by Vattenfall, the Swedish energy giant, but owned by an infrastructure fund, Greencoat UK Wind, which agreed in April to acquire the asset for £320m.
Since coming to market seven years ago with a plan to invest purely in wind farms in Britain, it has amassed a 36-site portfolio that provides enough electricity to power nearly a million homes.
Many of its deals are a carbon copy of South Kyle. Greencoat lets the big energy generators that need to “green” their portfolios take all the development risk and then provides a safe home for the asset when they want to free up capital. It has good relationships and long-term supply deals with five major utilities and, with only a 5pc share of the wind market, more to come.
Greencoat UK Wind vs FTSE 100
From 13 July ’15 to 10 July 09:29:12
Buying into a green dream has in the past been a risky business for investors but wind is well-established now, generating almost 20pc of Britain’s power. Apart from local appeals about spoiling views, its turbines are also less politically charged than nuclear power.
Greencoat is run by its namesake Greencoat Capital, a specialist renewables investor that has £5bn of assets under management and other funds focused on solar power, Irish wind and private equity.
Initially listed in 2013
, the fund raised £260m to fund the acquisition of six established wind farms from SSE and RWE, the German energy giant. To drum up more private investment in the sector, the Government briefly took a stake. Similar funds have followed, with decent success.
A 2019 report on the sector by Hardman & Co, a research firm, found that total returns for these listed renewable energy funds in the preceding five years approached 10pc. Such reliability has also made them popular, with the share price premium over net asset values typically in the range of 9pc-21pc.
To illustrate the excitement, Greencoat had no trouble raising £375m from investors in May last year at a 10pc premium to net asset value – the 10th time it has tapped the market for funds.
At a time when fossil fuel firms are out of favour and dividends from Shell and BP are under pressure, Greencoat’s 4.8pc yield is reassuring. It is targeting a 7.1p dividend this year, continuing to grow in line with the retail prices index.
Even though power prices came in below budget last year, the payout was still covered 1.4 times. The house broker, RBC, argues that the dip in forward power prices to below £40 per megawatt hour at the height of the Covid-19 crunch in March was a short-term blip and points out that half of the fund’s revenues come from fixed payments such as the Government’s “renewables obligation certificates”. And history suggests that the wind will keep blowing – especially in Scotland.
The double-digit ppremium to forecast net asset value at which the shares trade indicates that the market has no worries about Greencoat’s prospects. It was this mark-up plus political risk that persuaded Questor to turn seller of the stock in August last year
. The premium remains but political risk has fallen away as Rishi Sunak, the Chancellor, champions a green economic recovery.
Greencoat shares are worth tucking away. Its placings typically have a retail portion and are a good entry point because they are priced at a slight market discount.
Greencoat UK Wind key facts
- Market value: £2.2bn
- Year of listing: 2013
- Discount: 20.6pc premium
- Ave discount over past year: 17.3pc premium
- Yield (Dec 2019): 4.8pc
- Most recent year’s dividend: 6.94p
- Gearing: 26pc
- Annual charge (Dec 2019): 1pc
Questor says: buy