Energy insecurity has precipitated a predictable response among investors, who have moved into stocks tuned into rising prices. For Gresham House Energy Storage Fund, an investment trust set up to exploit the huge volatility in wholesale power prices that predated this year’s energy crisis, the shift has put the investment trust into the top ten highest returning funds in the past 12 months.
The shares have risen 35 per cent since the start of the year, markedly outperforming the FTSE All-Share Index. That leaves the investment trust trading at a 21 per cent premium to the top end of the net asset value range guided towards by the company for the end of June. What does that fat premium account for? The cashflows expected to be delivered by battery assets currently under construction and increased confidence that revenues will materialise as planned from batteries already operational.
The trust constructs and operates sites that house lithium ion batteries that can discharge power for up to an hour to the grid. The company buys power from the national grid when it is plentiful and cheap, such as in the middle of the night, and sells it back when demand, and the price, is higher. Currently, its assets are in the UK, but it has recently gained permission from shareholders to construct batteries in the European Economic Area, the US, Canada and Australia.
A growing asset base and rising revenue stream have helped with proof of concept. The NAV has increased from just under 100p a share at the end of March 2019, shortly after the fund’s 2018 flotation, to almost 132p a share at the end of March this year. In May, the trust told investors that the NAV would come in at the upper end of the 140p to 145p a share guidance range, as cashflows have been stronger than expected and assets revalued at a higher level.
Wholesale energy prices that have been hit by the war in Ukraine have provided a short-term boost. Longer term, revenues should be driven by a lack of energy storage capacity and the rise in renewable output. The inherent unpredictability of wind and solar power generation means that storage companies such as the Gresham fund can buy energy cheaply when there is an oversupply and potentially sell it for a much higher price. Analysts at Peel Hunt have forecast an NAV of 167p at the end of December and 196p at the same point next year. That factors in new projects being commissioned on time, which is not a given.
Pandemic-related supply chain disruption has continued to cause delays to some projects being completed this year. There is also the risk of cost inflation eroding the potential return from projects under construction.
Further capital raising activity, which seems likely in the medium-term to expand the asset base further, might also dilute that NAV per share figure. At the end of December, the trust had net cash of £122 million and a £180 million debt facility to draw upon. The company has set a target cap on debt levels of 25 per cent to 30 per cent of the trust’s NAV, which stood at £577 million at the end of March. Since then, it has raised another £150 million from investors, taking the total raised to £500 million since 2018.
Management is targeting a 7p-a- share dividend for this year, which would be in line with the previous two years. Why no increase? Cash is also being used to fund new projects, plus there is also one eye on making sure earnings continue to cover the dividend. At the current price, the shares offer a potential dividend yield of almost 4 per cent, hardly eye-watering by income stock standards, but still at a level offered by few companies pitched as high growth, that shows evidence of actually being delivered.
ADVICE Buy
WHY Shares offer a decent dividend and a good chance of further capital growth
Team17
Growth stocks have never been easily forgiven for faltering, but this year in particular any perceived weaknesses have been punished. For the pandemic winner Team17, the video games studio behind the Worms franchise, allegations made by employees of poor pay and working conditions and the closure of platform sales to Russia and Belarus gave investors more reason to dump the stock.
The shares have fallen 50 per cent since the start of this year and trade at just under 16 times forward earnings, down from a multiple of just over 40 at the start of January at a near record low. That reading looks too pessimistic given the group’s added scale and takeover potential.
Revenues over the first half of this year rose 33 per cent to a record £53 million, boosted by the acquisitions of Astragon Entertainment and StoryToys, which have given Team17 access to the children’s education and simulation games markets. The latter develops and publishes apps for brands including the Walt Disney Company and the Lego Group. Such acquisitions are part of a strategy to bulk out the library of games with third-party titles, in addition to its own intellectual property, from which it generates just over a third of revenue.
Shore Capital forecast revenue growth of 37 per cent for this year and a rise in adjusted pre-tax profits of only 8 per cent, which reflects the additional costs that have accompanied those acquisitions as well as wage inflation. However, the brokerage thinks profit growth will accelerate to a compound annual growth rate of almost 13 per cent over the next two years.
Cost inflation remains one of the major uncertainties, exacerbated by a lack of elasticity in sales prices for games in the back catalogue. But the risk of earnings downgrades is reflected in the modest profit multiple attached to the shares, one that could also make the company the target of a bid by a larger rival given the wave of M&A activity in the video game industry.
ADVICE Hold
WHY A low valuation reflects greater uncertainty around the impact of cost inflation
