Greencoat UK Wind PLC (LON: UKW): Sustainable business model and offering a decent dividend yield

Greencoat UK Wind Plc (LON: UKW) is an FTSE-250 listed UK based renewable infrastructure fund that invests in operating UK wind farms. The Company generates income by investing in operating onshore and offshore UK wind farms. UKW has a diverse portfolio and has investments in 37 wind farms across the UK. Moreover, it has an aggregate net capacity of 1,090 MW in the current portfolio of wind farm assets. Furthermore, UKW provides a regular stream of income through the payment of dividend to its shareholders, that increases with RPI (“Retail Price Index”) inflation.

(Source: Company Presentation) 

Recent Trend of Dividend Payments

(Source: Company Presentation)

The Group has a progressive dividend policy of generating consistent returns for its shareholders due to the high cash generative nature of operational wind farms and low leverage. The Company had declared an FY20 dividend of 7.10 pence per share, and it will pay a fourth quarterly dividend of 1.775 pence per share on 26 February 2021. Moreover, UKW expected to declare an FY21 dividend of 7.18 pence per share, increased in line with December 2020 RPI. The dividend yield of the Greencoat UK Wind is currently higher than the Equity Investment Instruments industry.

(Source: LSE, chart created by Kalkine Group)

Growth Prospects and Risk Assessment

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. Furthermore, the decarbonization of the electricity sector will be very critical in achieving the government’s target. The Company had not anticipated any material impact of the UK exiting the European Union on its business performance. UKW has a current market share of 5%, and the average age of the portfolio remained six years as of 31 December 2020.

However, the performance can be substantially impacted by the principal risk of disruption in the global economic environment, climate-related risk, legal and regulatory compliance, failure in the identification of quality wind assets, a slump in electricity demand, and Covid-19 related risk. UKW is also exposed to several financial risks such as price risk, liquidity risk, interest rate risk and credit risk. 

Industry Outlook Dynamics

With reference to the latest report from Grand View Research, the market demand of the global renewable power generation industry was 6890.7 TWh in 2019. The industry is forecasted to grow at a CAGR of 7.9% for the period from 2020 to 2027. Moreover, various conventional energy sources are getting replaced by renewable sources such as solar energy and wind energy. The growing worldwide energy crisis had also driven the need for power generation and sustainable energy.

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

Recent Developments

On 24 February 2021: The Company has acquired the remaining 50% interest in Braes of Doune wind farm for consideration of £48.1 million. It also announced that UKW had agreed with Banks Renewables Limited, which is to acquire a 49.9% interest in the Kype Muir Extension wind farm. The headline consideration amount is £51.4 million, which expects to be paid till Q4 FY22. Moreover, it will provide construction finance of around £47 million, with the first utilisation expected in July 2021.

A Glimpse of Operating Portfolio

(Source: Company Website)

Financial and Operational Highlights (for the year ended 31 December 2020 (FY20), as on 25 February 2021)

(Source: Company Website)

• The Company saw a significant year of growth during the period, with £400 million of new equity raised and £914 million invested.
• In 2020, portfolio generation stood 3% below budget at 2,952GWh, reflecting low power demand and low gas prices as a result of the Covid-19 pandemic and associated lockdown.
• The Company has increased the number of shares to 1.5 billion as compared with the previous year, with a gross asset value (GAV) of £3,329.9 million.
• On 31 December 2020, the Net Asset Value (NAV) stood at £2,229.9 million, and NAV per share was 122.2 pence, an increase from the previous year.
• Cash balances (Group and wind farm SPVs) surged by £7.6 million to £93.8 million over the year, with £400 million of available RCF commitments.
• The investment generated 1,494GWh of electricity and was above budget by 2%, with N2EX day ahead price (average) of £28.48/MWh.
• 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 Q1 FY23.
• As on 31 December 2020, the total outstanding borrowings stood at £1.1 billion, which is equivalent to GAV of 33%.
• It also increased the portfolio of operating wind farm investments to 38 with 1,173MW of net generating capacity as on 31 December 2020.
• The Board has proposed an interim dividend per share of 1.775 pence with respect to the three months ended 31 December 2020, reflecting a total dividend per share of 7.1 pence in 2020.
• The Company is aiming to deliver sustainable and attractive dividend yield to the investors in line with RPI inflation.
• Further, the Company has committed to acquire four further wind farms over the period 2021-2023.
• 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.
• Moreover, 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.

Financial Ratios (FY2020)

Share Price Performance Analysis

On 26 February 2021, at the time of writing (before the market close, at 8:10 AM GMT), Greencoat UK Wind PLC shares were trading at GBX 128.22, down by 0.60% against the previous day closing price. Stock 52-week High was GBX 150.00, and Low was GBX 99.90, respectively.

From a technical standpoint, 14-day RSI (21.15) supports the upside potential.

In the last two year, Greencoat UK Wind PLC’s stock price has delivered a return of ~12.37% as compared to ~10.00% return of FTSE 250 index and a negative ~2.23% return of FTSE All-Share Financial index, which shows that the stock has outperformed the benchmark index and the benchmark sector.

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

Business Outlook Scenario 

The Group had an encouraging outlook with the resilient financial and operational performance from the existing portfolio and an impressive pipeline of lucrative investment opportunities. The Company had currently 25GW of operating wind farms in the UK, consisting of 14GW onshore and 11GW offshore. Moreover, the secondary market for operating UK wind farms stood at approximately £70 billion. Meanwhile, UKW would continue to invest in ROC (“Renewables Obligation Certificates”) wind farms.  The Company would seize further diverse pipeline opportunities in subsidy-free wind farms and CFD (“computational fluid dynamics”) wind farms.

The Company had managed to generate robust cash flow during 2020 despite several operational headwinds caused by the Covid-19 pandemic and extremely volatile power prices. Moreover, the fixed cash flows represented approximately 61% of total cash flows on a DCF (“Discounted Cash Flow”) basis. Thus, UKW is well-positioned to generate consistent returns for its shareholders and accelerate the growth trajectory in the medium term.

(Source: Company Presentation)

Considering the recent acquisition initiatives and the attractive pipeline of acquisition opportunities (both onshore and offshore), resilient performance, sustainable dividend yield, decent operating and financial performance, robust cash generation capabilities, increase in the shareholders’ distribution, improved profitability margins, continuously paid a dividend 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 128.22 (as on 26 February 2021, before the market close at 8:10 AM GMT), with lower-double digit upside potential based on 14.97x Price/NTM Earnings (approx.) on FY21E 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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