How to analyse renewables shares
It’s a dry undertaking, but that’s what you’d expect of an asset class that should provide long-term income flows, writes
An analysis of renewable shares may seem somewhat dry to aggressive investors and analysts, but then again, what would you expect of an asset class that is supposed to provide retirement-supportive longterm income flows?
I would expect the mechanics of analysing these stocks to seem similar to assessing the property/Reit sectors. In fact, if the government wants the renewables sector to build up at a decent clip, it should consider Reit-type structures to house them.
Let’s look at some of the big names. Note that many renewables companies tend to state borrowing as a percentage of gross asset value (GAV), which is a replacement-focused valuation.
Greencoat UK Wind
The big daddy is Greencoat UK Wind (UKW), with a £3.8bn market cap, 5.3% dividend yield, five-year NAV return of 100% and five-year share return of 75% (all in sterling, and include dividends). Results to endDecember serve to illustrate how to assess them.
UKW’s 2022 power production was 5% below budget (low winds in H2) but cash flow was strong, reflecting high power prices. A strong dividend increase of 13.4% to 8.76p was supported by inflation (RPI) linked cash flows. The forward curve for short-term power prices came down from the Q3 level (back to a Q2 NAV level) but didn’t affect UKW as the Q3 forward rates weren’t used in Q3 NAV. Management says the forward power curve remains firm over the period 20232026.
Q4 NAV return was 9.1% (12.1p) to a 167.1p NAV, and a yearly increase of 33.6p. Main positive factors include lower discount rate (management reduced that from 8.2% to 8% unlevered or 10% levered), higher assumed short-term inflation and a 20p boost from higher power price assumptions, reduced by an “electricity generator levy” which cut NAV by 8p. This levy is a windfall tax on the price boost from the Ukraine war.
UKW has current debt of £1,780m (29% of GAV), well below mandated maximum debt of 40% of GAV. It must refinance debt facilities totalling £150m (current rate of 2%) in November and two facilities totalling £100m (about 2.18%) in 2024.
Recently, UKW has used excess cash flow to reduce its gearing, presumably as refinancing would happen at much higher rates. Numis believes the strong Q4 NAV total return outcome of 9.1% is an outlier; other results in the sector may be more pedestrian. Despite this strong growth, shares trade below the latest NAV, which is undemanding.
JLEN Environmental Assets Group and Foresight Solar Fund
I was snarky above on the merits of investing in hydrogen projects because of where they are on the development curve. However, JLEN Environmental is active across all types of alternative power, and the acquisition of a (look-through) 25% stake in a special purpose vehicle from associated holding company FHHG gives it a ticket to play without betting the farm.
Initially, JLEN will invest up to €5.7m in FHHG (small against its £787m market cap), but if that goes well it will have an option to scale up
further to a 1GW project. As an aside, the pure listed hydrogen fund Hydrogen One (HGEN) has also taken a stake in this project.
Green hydrogen will be produced through electrolysis powered by renewable electricity, and battery storage will be integrated.
Foresight Solar has a management company in common with JLEN, and, at £715m market cap, is similarly sized. Electricity generated was 8.6% higher in the UK, offsetting a weak Australian performance (12.5% below budget). Management says Australian assets performed well but not sufficiently to mitigate the impact of La Niña, which limited irradiation in
Australia.
The proportion of contracted revenue globally is 79% for 2023, 75% in 2024 and 66% in 2025. Positive operational factors and higher inflation offset negative valuation drivers, including higher discount rates and lower power prices. Q4 NAV was unchanged at 126.5p, so the share offers a 6.5% discount.
Total outstanding debt is £524.8m, representing 40.5% of GAV, well within the 50% limit. Numis noted that Q4 NAV was in line, but would be happy to see a refocus from Australia, to Europe. The 6.5% discount to NAV seems harsh given good earnings visibility in the next three years and yield of 6.1%.
Recently, UKW has used excess cash flow to reduce its gearing