Greencoat UK Wind Plc: Sound business model and offering decent dividend yield

Greencoat UK Wind Plc (LON: UKW) is a renewable infrastructure Company with the primary objective to invest in operating the UK wind farms and preserve capital on a real basis. The Company makes an investment only in income-producing offshore and onshore UK wind farms. UKW is the only UK domiciled renewable infrastructure fund or infrastructure fund to list on the London Stock Exchange main market.

The Company is managed by senior executives of Europe’s leading renewable investment manager, Greencoat Capital LLP, and is overseen by the board of directors, having vast experience. The Company has a large investor base, including multiple blue-chip institutional investors. Greencoat UK Wind makes investment in farms with a capacity of above 10 MW.

(Source: Company Presentation, Company Website)

Growth Prospects and Risk Assessment

UKW’s wind farms have increased the generating capacity from 127MW (megawatt) to 998MW since the IPO. Over the past seven years, it has delivered an incremental cash generation and distributed a lucrative dividend to the shareholders.

 (Source: Kalkine Research, Company Website)

(Source: Kalkine Research, Company Website)

The share price at the end of H1 FY20 was GBX 143.4 pence, represented a 19.4% premium to NAV. During FY19, the Company also completed the acquisition of Stronelairg and Dunmaglass wind farms, which is expected to commence operations in FY21. The Board of UKW believes that there is a significant market potential over the next few years with the mandate passed by the UK Parliament regarding decarbonisation.

 (Source: Kalkine Research, Company Website)

However, there are certain risk and uncertainties to business growth. The Covid-19 pandemic can impact the power prices in the short-term. Moreover, the expected real NAV growth is dependent on access to debt facilities. Adjacently, government regulations regarding energy policy can significantly increase the commercial costs and impact profitability. Moreover, 50% of the revenues are exposed to the floating power price. Furthermore, any deviation from expected lifespans of the wind farms can significantly impact the growth trajectory. 

Industry Outlook Dynamics

As per the report from Research and Markets, the market size of the global asset management market was valued nearly US$656.9 billion in 2019, and it is projected to reach US$788.8 billion in 2023. It is noteworthy that the global wealth and asset management industry is going through a market evolution with changes in technology, regulatory and fiscal policy. The key factors which will influence the market in the future include increasing demand for transparency, better risk management, Fintech innovations, rising incidents of cyberthreats, and complexity in global tax reporting. Moreover, the commercial cost pressure is likely to rise with growing distribution networks and the rising cost of complying with regulations. Furthermore, data mining for information on clients shall bring operational efficiencies.

Regarding the wind farm sector, there are nearly 24GW (gigawatt) of operating UK wind farms in the UK. In monetary terms, the UK wind farms’ market is valued around £70 billion. UKW holds a market share of approximately 4%. In 2013, wind energy supplied 7% of the UK’s electricity demand, and this figure increased to 20% in 2019. Going forward, the decarbonisation of the electricity sector would be a critical factor to drive the market further. The key value driver for the sector is the wholesale power price.

Key Fundamental Statistics

Key Shareholders Statistics

Recent Developments

3 September 2020: Greencoat UK Wind announced the issuance of new share through multiple tranches on next 12 months period.

1 September 2020: Greencoat UK Wind announced the signing of an agreement to acquire 25.1% interest of SSE in the Walney I and Walney II wind farms, for £350 million of headline consideration.

Key Performance Indicators

(Source: Annual Report, Company Website)

Financial & Operational Highlights – H1 FY2020 (30 June 2020)

(Source: Interim Report, Company Website)

• In the first half of the financial year 2020, due to lower power demand and gas prices because of coronavirus pandemic and related lockdown, the power price stood below budget, with N2EX Day Ahead price (average) of £28.48/MWh. The investment generated 1,494GWh of electricity and was above budget by 2%.
• The Company witnessed a significant improvement in power price recovery and expected average forward price to be £38/MWh from July to December.
• The Company generated net cash of £71.0 million with robust dividend cover of 1.3x for the period and expected to remain the same for the full-year.
• The Cash balance declined to £73.7 million, due to the use of cash resources in the acquisition of Slieve Divena II. With the acquisition, the Company increased the portfolio of operating wind farm investments to 36 with 998MW of net generating capacity as on 30 June 2020.
• UKW also signed an agreement to acquire a subsidy-free wind farm with 235MW capacity named South Kyle. The wind farm is expected to become operational in the year 2023.
• The Company is aiming to deliver sustainable and attractive dividend yield to the investors in line with RPI inflation; the Company delivered total dividends of 3.55 pence for the period (H1 FY2019: 3.47 pence).
• As on 30 June 2020, the total outstanding borrowings stood at £627 million, which is equivalent to GAV (Gross Asset Value) of 26%.

Financial Ratios – Strong Profitability Margins versus the Industry Median

Reported profitability metrics for the first half of the financial year 2020 were higher against the previous year data for the same period, reflecting higher return on investments and better control over expenses as compared to the industry. On leverage front, the debt-equity ratio was 0.34x, which was slightly higher as compared to the last year data for the same period of 0.31x, reflecting that the company is more leveraged as compared to the industry.  

Share Price Performance Analysis

(Source: Kalkine Research, Refinitiv)

On 21 September 2020 (before the market close, at 1:50 PM GMT+1), Greencoat UK Wind Plc shares were trading at GBX 131.80, down by 1.35% against the previous day closing price. Stock 52-week High was GBX 155.00 and Low of GBX 99.90, respectively.

 (Source: Kalkine Research, Refinitiv)

From the technical standpoint, 14-day RSI is currently supporting an upside move (around 23 level), which means the stock price is in oversold zone and could increase in the short term.

(Source: Kalkine Research, Refinitiv)

In the last five years, Greencoat UK Wind Plc share price has delivered ~16.70% return as compared to ~1.07 % return of FTSE-250 index, which shows that the stock has outperformed the index during the last five years.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Peers used in the valuation methodology (NTM P/E)

Business Outlook Scenario

It is anticipated that UKW would continue to invest in ROC (Renewable Obligation Certificate) wind farms and will further diversify the pipeline with subsidy-free wind farms. Meanwhile, it plans to maintain a balanced portfolio to meet investment objectives. In June 2019, the UK parliament adopted a net-zero emissions target for 2050 with mandated 80% emission reductions by 2050. The decarbonisation of the electricity sector will be critical to achieving this. Therefore, the prospects appear to be bright for the Company.

The Covid-19 pandemic and associated lockdown can cause extreme volatility in power prices in the short-term. However, the Company has been able to generate robust cash flows despite challenging times. Overall, it has proven operational and financial performance from the existing portfolio and having a healthy pipeline of attractive investment opportunities to emerge stronger in the long-term.

Over the course of 4 years (FY15 – FY19), the company's revenue surged from GBP 42.45 million in FY15 to GBP 89.24 million in FY19, compounded at an annual growth rate (CAGR) of ~20.41 per cent.

Considering the improved return on investments, increased financial performance and support from the valuation as done using the above method, we have given a “Buy” recommendation on Greencoat UK Wind Plc at the current price of GBX 131.80 (as on 21 September 2020, before the market close at 1:50 PM GMT+1), with lower double-digit upside potential based on 12.95x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).  

*Dividend Yield may vary as per the stock price movement.

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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