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Huge discounts on renewable energy investment trusts – has the catalyst for sector re-rating arrived?
2/7/24
5 min
Renewable energy
Insight
Why are renewable energy investment trusts trading at their current steep discounts? I’ll try to unpick some of the factors and then look at recent acquisition activity in adjacent sectors to see if we can draw parallels to our own. The market is moving very quickly. Could the catalyst for a sector re-rating be emerging?
Why the discount?
One of the main reasons cited for the infrastructure trust sector trading at such a discount to NAV is that the market has little confidence in the book value that investment trusts are publishing in their quarterly NAVs.
This seems odd, given the current discounts imply portfolio returns well in excess of what the assets can be acquired for in the open market. To illustrate the point, too many companies have sold assets at or above their holding value over the last six months for it to be some sort of systemic sector failing.
Another reason is that returns on government treasuries are the highest they have been for a decade, which can be seen as an attractive alternative to the income paid by Companies in the infrastructure sector. This could be a valid point if UK treasuries are sitting at 5% and sector yields at 6-7%, so on a risk-adjusted basis it is easy to see why capital has flown out of the sector and into the hands of the UK government. However, we question whether this still looks as attractive in 2024 as it did in 2023 as UK 10-year nominal treasury yields have fallen from their 2023 highs of close to 5% to c. 4% now. Yields in our sector currently range from 7.7% to over 10% at the current discounts. A 1-2% spread over the treasury yield in 2023 has now expanded to a 3.5-6% spread today.
While the above comparison is relevant for UK portfolios, how does this compare to trusts with significant European exposures given that long-term government bond rates in the Eurozone are materially lower? Are we even comparing like for like?
Some sector analysts are taking the right approach by taking a mix of government treasuries approximating the mix of revenues within the relevant portfolio (spoiler alert, this means that the reference rate is going to be lower still – e.g. France 10 year is at 3%, German 10 year is sitting at 2.5% at the moment).
Staying on the subject of yield, portfolio revenues in the sector tend to have some inflation linkage. Assets that benefit from UK subsidies under the Feed in Tariff (FiT) or ROC regime, for example solar and wind, have significant portions of their revenues (often up to 50% or so) directly linked to RPI. Other assets have long term power purchase agreements with direct inflation linkage and is the reason why infrastructure trust companies are able to offer progressive dividends that increase each year. While few trusts always offer to increase dividends in line with inflation, the overall track record of dividend growth in the last couple of years provides a strong indication that an increase in revenues supports increased dividends in times of high inflation.
In the UK, if we look closer at the yields on, for example, UK 10-year inflation-linked government treasuries, we see they are yielding more in the 1.2% range (plus inflation). Too far? Not all revenues are index linked. Perhaps a closer benchmark for comparison could be a mix of the Euro- and UK-focused trusts, reflecting the underlying nature of revenues. Either way, the spreads look more attractive.
It’s also worth noting that government treasuries offer no capital appreciation, while many of the infrastructure trusts are growing NAV and therefore there is an element of capital appreciation, providing this is reflected in the share price of course…
What is also undoubtedly a factor in the NAV discounts are the MIFID II and PRIIPS cost disclosure rules where the FCA has applied an interpretation to the relevant regulations that has not been adopted by any other nation. As a result, investment trusts are forced to display what can often be misleading information on costs to investors, which makes trusts less attractive when compared to other global investments. It is the subject of a private members bill in the House of Lords by Baroness Altmann.
So, if none of the factors above are actually driving the discount what is? Is it as simple as supply and demand? Why are UK infrastructure trusts not attractive enough at 20% or 30% off NAV? Are the outflows investors in our sector are suffering simply putting downward pressure on share prices and soaking up liquidity? Perhaps. If so, what is going to stem this inexorable tide? What is going to be the catalyst for a re-rating of our sector if the fundamental performance of the asset class is sound? Perhaps we should look at adjacent sectors.
Is the catalyst here?
Hypgnosis (SONG) is an investment trust that in July 2018 listed on the main market of the London Stock Exchange to offer investors access to songs and associated musical intellectual property rights. Like other investment trusts in the renewable energy space, it traded at a significant premium to NAV and then slid to a prolonged discount. On 18 March, 2024, it was trading at $0.75, a 32% discount to the operative NAV as at September 2023 of $1.11 per share.
On 18 April, Concord Chorus made a recommended cash offer to acquire Hipgnosis for $1.16 per share ($1.4 billion), a c.4% premium to the September NAV. Then things got interesting. Two days later, Blackstone countered with a $1.24 per share offer, which led Concord to increase its bid to $1.25 on 24 April. A final recommended offer from Blackstone on 29 April at $1.30 was unanimously recommended by the Hipgnosis Board, a 17% premium to the September NAV and a whopping 58% premium to the trailing three-month volume weighted average share price for the 3 months to 17 April.
On 29 May 2024 the Board of Foresight Forestry Company plc (“FSFC” – a vehicle managed by Foresight Group) announced that it was recommending a £0.97 per share offer from Averon Park, a vehicle managed by Foresight Group. The recommendation is a c.33% premium to the closing price on 28 May, a 43% premium to the volume weighted price for the last 3 months and a 5% discount to the prevailing NAV.
In the examples of Hypgnosis and Foresight Forestry it is clear the underlying valuation of the trusts and their respective asset portfolios were not reflected in the share prices of the two trusts. Can there be similar catalysts for our sector where the markets recognise the underlying asset portfolio valuations, which in turn will materially bring up share prices, with the sector soon trading around NAV again?
Any personal opinions expressed are of the author at the time of publication and are subject to change and should not be interpreted as advice or a recommendation.
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Why are renewable energy investment trusts trading at their current steep discounts? I’ll try to unpick some of the factors and then look at recent acquisition activity in adjacent sectors to see if we can draw parallels to our own. The market is moving very quickly. Could the catalyst for a sector re-rating be emerging?
Why the discount?
One of the main reasons cited for the infrastructure trust sector trading at such a discount to NAV is that the market has little confidence in the book value that investment trusts are publishing in their quarterly NAVs.
This seems odd, given the current discounts imply portfolio returns well in excess of what the assets can be acquired for in the open market. To illustrate the point, too many companies have sold assets at or above their holding value over the last six months for it to be some sort of systemic sector failing.
Another reason is that returns on government treasuries are the highest they have been for a decade, which can be seen as an attractive alternative to the income paid by Companies in the infrastructure sector. This could be a valid point if UK treasuries are sitting at 5% and sector yields at 6-7%, so on a risk-adjusted basis it is easy to see why capital has flown out of the sector and into the hands of the UK government. However, we question whether this still looks as attractive in 2024 as it did in 2023 as UK 10-year nominal treasury yields have fallen from their 2023 highs of close to 5% to c. 4% now. Yields in our sector currently range from 7.7% to over 10% at the current discounts. A 1-2% spread over the treasury yield in 2023 has now expanded to a 3.5-6% spread today.
While the above comparison is relevant for UK portfolios, how does this compare to trusts with significant European exposures given that long-term government bond rates in the Eurozone are materially lower? Are we even comparing like for like?
Some sector analysts are taking the right approach by taking a mix of government treasuries approximating the mix of revenues within the relevant portfolio (spoiler alert, this means that the reference rate is going to be lower still – e.g. France 10 year is at 3%, German 10 year is sitting at 2.5% at the moment).
Staying on the subject of yield, portfolio revenues in the sector tend to have some inflation linkage. Assets that benefit from UK subsidies under the Feed in Tariff (FiT) or ROC regime, for example solar and wind, have significant portions of their revenues (often up to 50% or so) directly linked to RPI. Other assets have long term power purchase agreements with direct inflation linkage and is the reason why infrastructure trust companies are able to offer progressive dividends that increase each year. While few trusts always offer to increase dividends in line with inflation, the overall track record of dividend growth in the last couple of years provides a strong indication that an increase in revenues supports increased dividends in times of high inflation.
In the UK, if we look closer at the yields on, for example, UK 10-year inflation-linked government treasuries, we see they are yielding more in the 1.2% range (plus inflation). Too far? Not all revenues are index linked. Perhaps a closer benchmark for comparison could be a mix of the Euro- and UK-focused trusts, reflecting the underlying nature of revenues. Either way, the spreads look more attractive.
It’s also worth noting that government treasuries offer no capital appreciation, while many of the infrastructure trusts are growing NAV and therefore there is an element of capital appreciation, providing this is reflected in the share price of course…
What is also undoubtedly a factor in the NAV discounts are the MIFID II and PRIIPS cost disclosure rules where the FCA has applied an interpretation to the relevant regulations that has not been adopted by any other nation. As a result, investment trusts are forced to display what can often be misleading information on costs to investors, which makes trusts less attractive when compared to other global investments. It is the subject of a private members bill in the House of Lords by Baroness Altmann.
So, if none of the factors above are actually driving the discount what is? Is it as simple as supply and demand? Why are UK infrastructure trusts not attractive enough at 20% or 30% off NAV? Are the outflows investors in our sector are suffering simply putting downward pressure on share prices and soaking up liquidity? Perhaps. If so, what is going to stem this inexorable tide? What is going to be the catalyst for a re-rating of our sector if the fundamental performance of the asset class is sound? Perhaps we should look at adjacent sectors.
Is the catalyst here?
Hypgnosis (SONG) is an investment trust that in July 2018 listed on the main market of the London Stock Exchange to offer investors access to songs and associated musical intellectual property rights. Like other investment trusts in the renewable energy space, it traded at a significant premium to NAV and then slid to a prolonged discount. On 18 March, 2024, it was trading at $0.75, a 32% discount to the operative NAV as at September 2023 of $1.11 per share.
On 18 April, Concord Chorus made a recommended cash offer to acquire Hipgnosis for $1.16 per share ($1.4 billion), a c.4% premium to the September NAV. Then things got interesting. Two days later, Blackstone countered with a $1.24 per share offer, which led Concord to increase its bid to $1.25 on 24 April. A final recommended offer from Blackstone on 29 April at $1.30 was unanimously recommended by the Hipgnosis Board, a 17% premium to the September NAV and a whopping 58% premium to the trailing three-month volume weighted average share price for the 3 months to 17 April.
On 29 May 2024 the Board of Foresight Forestry Company plc (“FSFC” – a vehicle managed by Foresight Group) announced that it was recommending a £0.97 per share offer from Averon Park, a vehicle managed by Foresight Group. The recommendation is a c.33% premium to the closing price on 28 May, a 43% premium to the volume weighted price for the last 3 months and a 5% discount to the prevailing NAV.
In the examples of Hypgnosis and Foresight Forestry it is clear the underlying valuation of the trusts and their respective asset portfolios were not reflected in the share prices of the two trusts. Can there be similar catalysts for our sector where the markets recognise the underlying asset portfolio valuations, which in turn will materially bring up share prices, with the sector soon trading around NAV again?
Any personal opinions expressed are of the author at the time of publication and are subject to change and should not be interpreted as advice or a recommendation.
Share
Why are renewable energy investment trusts trading at their current steep discounts? I’ll try to unpick some of the factors and then look at recent acquisition activity in adjacent sectors to see if we can draw parallels to our own. The market is moving very quickly. Could the catalyst for a sector re-rating be emerging?
Why the discount?
One of the main reasons cited for the infrastructure trust sector trading at such a discount to NAV is that the market has little confidence in the book value that investment trusts are publishing in their quarterly NAVs.
This seems odd, given the current discounts imply portfolio returns well in excess of what the assets can be acquired for in the open market. To illustrate the point, too many companies have sold assets at or above their holding value over the last six months for it to be some sort of systemic sector failing.
Another reason is that returns on government treasuries are the highest they have been for a decade, which can be seen as an attractive alternative to the income paid by Companies in the infrastructure sector. This could be a valid point if UK treasuries are sitting at 5% and sector yields at 6-7%, so on a risk-adjusted basis it is easy to see why capital has flown out of the sector and into the hands of the UK government. However, we question whether this still looks as attractive in 2024 as it did in 2023 as UK 10-year nominal treasury yields have fallen from their 2023 highs of close to 5% to c. 4% now. Yields in our sector currently range from 7.7% to over 10% at the current discounts. A 1-2% spread over the treasury yield in 2023 has now expanded to a 3.5-6% spread today.
While the above comparison is relevant for UK portfolios, how does this compare to trusts with significant European exposures given that long-term government bond rates in the Eurozone are materially lower? Are we even comparing like for like?
Some sector analysts are taking the right approach by taking a mix of government treasuries approximating the mix of revenues within the relevant portfolio (spoiler alert, this means that the reference rate is going to be lower still – e.g. France 10 year is at 3%, German 10 year is sitting at 2.5% at the moment).
Staying on the subject of yield, portfolio revenues in the sector tend to have some inflation linkage. Assets that benefit from UK subsidies under the Feed in Tariff (FiT) or ROC regime, for example solar and wind, have significant portions of their revenues (often up to 50% or so) directly linked to RPI. Other assets have long term power purchase agreements with direct inflation linkage and is the reason why infrastructure trust companies are able to offer progressive dividends that increase each year. While few trusts always offer to increase dividends in line with inflation, the overall track record of dividend growth in the last couple of years provides a strong indication that an increase in revenues supports increased dividends in times of high inflation.
In the UK, if we look closer at the yields on, for example, UK 10-year inflation-linked government treasuries, we see they are yielding more in the 1.2% range (plus inflation). Too far? Not all revenues are index linked. Perhaps a closer benchmark for comparison could be a mix of the Euro- and UK-focused trusts, reflecting the underlying nature of revenues. Either way, the spreads look more attractive.
It’s also worth noting that government treasuries offer no capital appreciation, while many of the infrastructure trusts are growing NAV and therefore there is an element of capital appreciation, providing this is reflected in the share price of course…
What is also undoubtedly a factor in the NAV discounts are the MIFID II and PRIIPS cost disclosure rules where the FCA has applied an interpretation to the relevant regulations that has not been adopted by any other nation. As a result, investment trusts are forced to display what can often be misleading information on costs to investors, which makes trusts less attractive when compared to other global investments. It is the subject of a private members bill in the House of Lords by Baroness Altmann.
So, if none of the factors above are actually driving the discount what is? Is it as simple as supply and demand? Why are UK infrastructure trusts not attractive enough at 20% or 30% off NAV? Are the outflows investors in our sector are suffering simply putting downward pressure on share prices and soaking up liquidity? Perhaps. If so, what is going to stem this inexorable tide? What is going to be the catalyst for a re-rating of our sector if the fundamental performance of the asset class is sound? Perhaps we should look at adjacent sectors.
Is the catalyst here?
Hypgnosis (SONG) is an investment trust that in July 2018 listed on the main market of the London Stock Exchange to offer investors access to songs and associated musical intellectual property rights. Like other investment trusts in the renewable energy space, it traded at a significant premium to NAV and then slid to a prolonged discount. On 18 March, 2024, it was trading at $0.75, a 32% discount to the operative NAV as at September 2023 of $1.11 per share.
On 18 April, Concord Chorus made a recommended cash offer to acquire Hipgnosis for $1.16 per share ($1.4 billion), a c.4% premium to the September NAV. Then things got interesting. Two days later, Blackstone countered with a $1.24 per share offer, which led Concord to increase its bid to $1.25 on 24 April. A final recommended offer from Blackstone on 29 April at $1.30 was unanimously recommended by the Hipgnosis Board, a 17% premium to the September NAV and a whopping 58% premium to the trailing three-month volume weighted average share price for the 3 months to 17 April.
On 29 May 2024 the Board of Foresight Forestry Company plc (“FSFC” – a vehicle managed by Foresight Group) announced that it was recommending a £0.97 per share offer from Averon Park, a vehicle managed by Foresight Group. The recommendation is a c.33% premium to the closing price on 28 May, a 43% premium to the volume weighted price for the last 3 months and a 5% discount to the prevailing NAV.
In the examples of Hypgnosis and Foresight Forestry it is clear the underlying valuation of the trusts and their respective asset portfolios were not reflected in the share prices of the two trusts. Can there be similar catalysts for our sector where the markets recognise the underlying asset portfolio valuations, which in turn will materially bring up share prices, with the sector soon trading around NAV again?
Any personal opinions expressed are of the author at the time of publication and are subject to change and should not be interpreted as advice or a recommendation.
Share
Why are renewable energy investment trusts trading at their current steep discounts? I’ll try to unpick some of the factors and then look at recent acquisition activity in adjacent sectors to see if we can draw parallels to our own. The market is moving very quickly. Could the catalyst for a sector re-rating be emerging?
Why the discount?
One of the main reasons cited for the infrastructure trust sector trading at such a discount to NAV is that the market has little confidence in the book value that investment trusts are publishing in their quarterly NAVs.
This seems odd, given the current discounts imply portfolio returns well in excess of what the assets can be acquired for in the open market. To illustrate the point, too many companies have sold assets at or above their holding value over the last six months for it to be some sort of systemic sector failing.
Another reason is that returns on government treasuries are the highest they have been for a decade, which can be seen as an attractive alternative to the income paid by Companies in the infrastructure sector. This could be a valid point if UK treasuries are sitting at 5% and sector yields at 6-7%, so on a risk-adjusted basis it is easy to see why capital has flown out of the sector and into the hands of the UK government. However, we question whether this still looks as attractive in 2024 as it did in 2023 as UK 10-year nominal treasury yields have fallen from their 2023 highs of close to 5% to c. 4% now. Yields in our sector currently range from 7.7% to over 10% at the current discounts. A 1-2% spread over the treasury yield in 2023 has now expanded to a 3.5-6% spread today.
While the above comparison is relevant for UK portfolios, how does this compare to trusts with significant European exposures given that long-term government bond rates in the Eurozone are materially lower? Are we even comparing like for like?
Some sector analysts are taking the right approach by taking a mix of government treasuries approximating the mix of revenues within the relevant portfolio (spoiler alert, this means that the reference rate is going to be lower still – e.g. France 10 year is at 3%, German 10 year is sitting at 2.5% at the moment).
Staying on the subject of yield, portfolio revenues in the sector tend to have some inflation linkage. Assets that benefit from UK subsidies under the Feed in Tariff (FiT) or ROC regime, for example solar and wind, have significant portions of their revenues (often up to 50% or so) directly linked to RPI. Other assets have long term power purchase agreements with direct inflation linkage and is the reason why infrastructure trust companies are able to offer progressive dividends that increase each year. While few trusts always offer to increase dividends in line with inflation, the overall track record of dividend growth in the last couple of years provides a strong indication that an increase in revenues supports increased dividends in times of high inflation.
In the UK, if we look closer at the yields on, for example, UK 10-year inflation-linked government treasuries, we see they are yielding more in the 1.2% range (plus inflation). Too far? Not all revenues are index linked. Perhaps a closer benchmark for comparison could be a mix of the Euro- and UK-focused trusts, reflecting the underlying nature of revenues. Either way, the spreads look more attractive.
It’s also worth noting that government treasuries offer no capital appreciation, while many of the infrastructure trusts are growing NAV and therefore there is an element of capital appreciation, providing this is reflected in the share price of course…
What is also undoubtedly a factor in the NAV discounts are the MIFID II and PRIIPS cost disclosure rules where the FCA has applied an interpretation to the relevant regulations that has not been adopted by any other nation. As a result, investment trusts are forced to display what can often be misleading information on costs to investors, which makes trusts less attractive when compared to other global investments. It is the subject of a private members bill in the House of Lords by Baroness Altmann.
So, if none of the factors above are actually driving the discount what is? Is it as simple as supply and demand? Why are UK infrastructure trusts not attractive enough at 20% or 30% off NAV? Are the outflows investors in our sector are suffering simply putting downward pressure on share prices and soaking up liquidity? Perhaps. If so, what is going to stem this inexorable tide? What is going to be the catalyst for a re-rating of our sector if the fundamental performance of the asset class is sound? Perhaps we should look at adjacent sectors.
Is the catalyst here?
Hypgnosis (SONG) is an investment trust that in July 2018 listed on the main market of the London Stock Exchange to offer investors access to songs and associated musical intellectual property rights. Like other investment trusts in the renewable energy space, it traded at a significant premium to NAV and then slid to a prolonged discount. On 18 March, 2024, it was trading at $0.75, a 32% discount to the operative NAV as at September 2023 of $1.11 per share.
On 18 April, Concord Chorus made a recommended cash offer to acquire Hipgnosis for $1.16 per share ($1.4 billion), a c.4% premium to the September NAV. Then things got interesting. Two days later, Blackstone countered with a $1.24 per share offer, which led Concord to increase its bid to $1.25 on 24 April. A final recommended offer from Blackstone on 29 April at $1.30 was unanimously recommended by the Hipgnosis Board, a 17% premium to the September NAV and a whopping 58% premium to the trailing three-month volume weighted average share price for the 3 months to 17 April.
On 29 May 2024 the Board of Foresight Forestry Company plc (“FSFC” – a vehicle managed by Foresight Group) announced that it was recommending a £0.97 per share offer from Averon Park, a vehicle managed by Foresight Group. The recommendation is a c.33% premium to the closing price on 28 May, a 43% premium to the volume weighted price for the last 3 months and a 5% discount to the prevailing NAV.
In the examples of Hypgnosis and Foresight Forestry it is clear the underlying valuation of the trusts and their respective asset portfolios were not reflected in the share prices of the two trusts. Can there be similar catalysts for our sector where the markets recognise the underlying asset portfolio valuations, which in turn will materially bring up share prices, with the sector soon trading around NAV again?
Any personal opinions expressed are of the author at the time of publication and are subject to change and should not be interpreted as advice or a recommendation.
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