Power price declines put renewable trusts under pressure

Stifel explains its ‘sell’ ratings on NextEnergy Solar and John Laing Environmental Assets  
Thursday 21 Jun 2018 Author: Steven Frazer

The spotlight has fallen on infrastructure investment trusts after two separate closed-end funds have come under fire from analysts at investment bank Stifel.

It is negative on the immediate prospects for NextEnergy Solar Fund (NESF) and John Laing Environmental Assets (JLEN) largely because of declining power price assumptions that act as a drag on net asset value (NAV).

Long-term power price assumptions have fallen by 7.7% on 25 year forecasts, according to one electricity consultant, say Stifel’s investment trust team.

NextEnergy saw its full year to 31 March 2019 power price predictions cut by nearly 10%, versus a 5.2% decline at the half year stage.

Factors such as sterling depreciation, US dollar-denominated gas prices decreasing and a reduction in the marginal cost of capital for renewables have combined to work against assumptions being made about future power prices.

This capped NAV progress for both trusts in the last financial year. John Laing’s NAV for the financial year to 31 March 2018 was reported at 99.6p per share, just 1.1% higher than the 98.5p per share 12 months earlier.

NextEnergy’s NAV stayed virtually flat during its full year, edging down from 104.9p to 104.7p. This result has sparked Stifel to call into question current 6% to 7% share price to NAV premiums, particularly given the likelihood that new shares will be issued in the future, presumably to provide acquisition funding.

‘We would be more comfortable with this fund and the rest of the renewables sector trading on a small single-digit premium given the likelihood of ongoing equity issuance,’ say Stifel’s Iain Scouller and Anthony Stern.

The analysts are also concerned about skinny dividend cover at NextEnergy this year, which they calculate at 1.05-times. NextEnergy paid four quarterly dividends last year totalling 6.42p per share and management have spelled out a target of 6.65p per share in shareholder payouts this year.

John Laing’s 6.31p per share dividend last year was covered just 1.1-times according to calculations based on Stifel’s declared dividend measure. The trust anticipates upping the payout this year by 3.2% to 6.51p per share, implying a 6.35% income yield.

Stifel makes the point that new equity funds are typically raised at a small discount to prevailing share prices. This implies, they say, that there will be ‘better entry points than the current market price.’ (SF)

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