Greencoat UK Wind PLC (LON: UKW) – Extensive Portfolio of Quality Wind Assets

Greencoat UK Wind PLC is a UK based company that invests in operating UK wind farms. The Company has invested in operating onshore and offshore UK wind farms, which are income-generating. The Company’s existing portfolio consists of interests in SPVs which hold particular wind farm assets.  The Company has an extensive portfolio with an investment in 37 operating wind farms located in the UK. The current portfolio of wind farm assets has an aggregate net capacity of 1,090 MW. The Company provides a regular stream of income to its shareholders through annual dividend payments. The Company is included in the FTSE-250 index.

Portfolio Overview

 (Source: Company website)

Shareholder Return through Dividend Payment

The investment in Greencoat UK Wind gives investors exposure to a portfolio of operational wind energy generation assets in the UK. The Company aims to provide investors with an annual dividend per common share, and the dividend payment is expected to increase with RPI inflation. The Company reinvests the excess cash flow to protect the real value of its investment portfolio. Greencoat UK Wind targets to make an annual dividend payment of 7.1 pence per ordinary share in 2020 and the Company paid a dividend of 6.94 pence in 2019. The Company targets a return to investors equivalent to an IRR net of fees and expenses of eight to nine per cent.

Growth Prospects and Risk Assessment

Greencoat UK Wind should be able to provide attractive returns from a portfolio of operational wind energy generation assets in the UK as the climate is very favourable for wind energy. The regulatory measures of the UK government are very supportive of renewable energy.  The Company believes that developers and operators of wind farms in the UK will attract new and long-term investment in the sector. Thus the Company has an opportunity to purchase outright sales of assets or co-invest into operating wind farm assets. The Company expects to generate value through long term ownership of operating assets. The Company wants control over the pricing of energy generated, and it does not need a long term fixed price PPAs. In the case of co-investment in wind projects, the Company will seek partners who can independently fund the project and do not use secured project finance debt. Greencoat UK Wind expects that the value of operating UK wind farms will increase to nearly £70 billion.

The gross asset value of the portfolio stands at £2,449.7 million, of which £2,359.1 million is for operating portfolio and £19.7 million for construction portfolio. The revenue of the Company has grown at a CAGR of around 17.36% between 2015 and 2019.

(Source: Company website)

Meanwhile, failure in the identification of quality wind assets can impact the business activity and profitability of the Company. During the pandemic, the electricity demand has declined, and lower gas prices had a significant impact on the power price. If the life span of the wind turbine reduces, it will affect future business continuity. The Company gets a wide range of support from the government’s policy on renewable energy and any changes that do not promote or incentivize the renewable energy sector will be very critical for business. 

Industry Outlook Dynamics

The UK government has set a target to meet 15% of its final energy consumption from renewable, and close to 30% of the UK’s electricity will need to come from renewable sources. The government is extending incentives on the use of renewable sources to meet its target. The share of renewables in electricity generation has increased from 6.8% in 2010 to 35% in 2019. The government has also set a framework to reduce carbon emission. Wind energy provides an incredible opportunity for electricity generation from renewable sources. The cost of onshore wind turbines is lower when compared to the current costs of other renewable technologies.

(Source: BEIS, Company website)

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Greencoat UK Wind Plc.

Recent Developments

On 23 November 2020: The Company has agreed to acquire a Humber Gateway offshore wind farm as part of a consortium with several pension funds. Overall, it has acquired 49% stake in Humber from RWE, for a total cash consideration of £648 million (acquire a net 38% for £500 million while the pension funds will acquire a net 11% for £148 million).

On 2 November 2020: UKW announced that 310,604 Ordinary Shares would be allotted and issued to the Investment Manager, which is at a price of 1 pence each.

A Glimpse of Operating Portfolio (September 2020)

(Source: Company Website)

September 2020 Trading Update (as on 28 October 2020)

• The Company has increased the number of shares to 1.8 billion, with gross asset value (GAV) of £2,801.9 million and aggregate group debt of £600 million.
• In September 2020, the Net Asset Value (NAV) stood at £2,201.9 million, and NAV per share was 120.7 pence, with a significant recovery in short term power prices.
• Led by low wind resource, the Company in Q3 has generated 8% lower budget.
• It has £350 million investment in Walney offshore wind farm and £400 million of equity issuance and full RCF repayment.
• The Company witnessed a cash balance of £71.6 million and £400 million of available RCF commitments.
• In Q2 FY20, the dividend per share was 1.775 pence, and it is targeting 2020 annual dividend per share of 7.1 pence.
• UKW’s portfolio includes interests in 37 operating wind farms and one wind farm under construction.
• Further, the Company has committed to acquire four further wind farms over the period 2021-2023.

Financial and Operational Highlights (for the six months ended 30 June 2020 (H1 FY20), as on 30 July 2020)

(Source: Company Website)

• In H1 FY20, the power price stood below budget, due to lower power demand and gas prices because of the Covid-19 pandemic and related lockdown.
• The investment generated 1,494GWh of electricity and was above budget by 2%, with N2EX day ahead price (average) of £28.48/MWh.
• It generated net cash of £71 million with robust dividend cover of 1.3x for the period and expected to remain the same for the full year.
• UKW 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.
• As on 30 June 2020, the total outstanding borrowings stood at £627 million, which is equivalent to GAV of 26%.
• It also increased the portfolio of operating wind farm investments to 36 with 998MW of net generating capacity as on 30 June 2020.
• The Company is aiming to deliver sustainable and attractive dividend yield to the investors in line with RPI inflation.
• UKW delivered the dividend per share of 3.55 pence in H1 FY20, an increase of 2.3% from the corresponding period of the last year.
• Overall, it witnessed a significant improvement in power price recovery and expected average forward price to be £38/MWh from July to December.

Share Price Performance Analysis

(Source: Refinitiv, chart created by Kalkine Group)

On 27 November 2020, at the time of writing (before the market close, at 10:50 AM GMT), Greencoat UK Wind Plc shares were trading at GBX 128.57, down by 0.95% against the previous day closing price. Stock 52-week High was GBX 155.00 and Low of GBX 99.90, respectively.

From a technical standpoint, we could see a positive movement in the share price based on the 50-day RSI (48.51).

In the last five years, Greencoat UK Wind Plc share price has delivered around 19% return as compared to the approximately 12.66% 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)

Business Outlook Scenario

In H1 FY20, the Company generated 1,494 GWh of electricity with a cash generation of £71.0 million. The Company is investing in expanding the portfolio of assets with quality wind farms and believes that there will be opportunities for the Company to invest in projects that can generate impressive shareholder returns. The Company has currently 24GW of operating UK wind farms of which 14GW is onshore, and 10 GW is offshore. Greencoat UK Wind has a market share of around 4%, and its portfolio has an average asset age of 5.8 years. The net-zero emission target by 2050 adopted by the UK government will provide a further boost to the renewable sector, and it will strengthen the Company’s role. The decarbonization of the electricity sector will be very critical in achieving the government’s target. The contract for difference (CFD) regime will support the 40GW onshore wind capacity target by 2030, and the construction of onshore wind farms on a subsidy-free basis is increasing. As the UK exit the European Union, the Company does not see any material impact on its business continuity and finances.

The wholesale power price is the key driver for the NAV value of the Company, and it is expected the wholesale power price in the UK is expected to increase. The Company will invest in the renewable obligation certificate (ROC) wind farms. The Company’s total cash flows have remained healthy despite the impact of the pandemic, and fixed revenue is expected to be 64% of the projected 2020 revenue, and merchant revenue will be 36%.

Considering the recent acquisition, resilient performance, significant recovery in short term power prices, target dividend of 7.2 pence in 2020, sustainable business model, decent operating and financial performance, robust cash generation, improved profitability margins, the attractive pipeline of acquisition opportunities (both onshore and offshore), consistent dividend payout from the last eight years, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Greencoat UK Wind at the current price of GBX 128.57 (as on 27 November 2020, before the market close at 10:50 AM GMT), with lower-double digit upside potential based on 14.90x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

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

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

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