Gresham House Energy Storage Fund ended last year as one of the best performing investment trusts listed in London. Two challenges halted that stellar run for the battery storage company.
One, rising interest rates, ended cheap financing for infrastructure specialists such as Gresham, which trades under the ticker GRID. Two, cost inflation and supply chain disruption, delayed the completion of some projects and risk eroding the return on developments.
The premium baked into the shares against the company’s net asset value has narrowed to 5 per cent, compared with more than 20 per cent just six months ago. That may underestimate growth potential.
The fund constructs and operates sites for lithium ion batteries that can discharge power to the grid for up to an hour. It buys from the National Grid when it is cheap, such as at night, and sells it back when demand, and price, is higher.
Ramping-up capacity as batteries become operational pushed net asset value up by a third to 155.5p a share by the end of last year. The trust has been building capacity at breakneck speed since its 2018 flotation. At the end of December, its storage potential stood at 550MW, up from 425MW a year earlier.
Management has pointed towards another rise in NAV to about 161p a share by the end of March, as more projects move closer to completion and it signs more regulatory supply contracts with National Grid.
The Gresham fund generates only a small proportion of its revenue from index-linked government contracts, at roughly 7 to 8 per cent of total income. Instead, most money is made from the difference between buying cheap energy when too much has been generated and selling it back at a higher rate. Lower energy prices could take a chip out of earnings this year, but what GRID relies on is volatility in generation.
Why should investors feel pretty confident that the valuation placed on GRID’s assets is accurate enough? GRID uses a higher discount rate to value the future cashflows expected from its assets than most London-listed renewable infrastructure companies. Last year it increased the discount rate to 10.9 per cent, from 10.8 per cent, partly to reflect higher interest rates and also construction cost inflation.
That is higher than the discount rate used by its closest London-listed peer, Gore Street Energy Storage Fund, which employed an average rate of 9.3 per cent over the six months to the end of September. There is the opportunity for the rate to compress as the projects under construction become operational.
If interest rates are nearing their peak, as money markets have priced in, that could provide more clarity for the discount rate. So too, could easing cost inflation and improving supply chains. Both are improving, shipping rates have “collapsed” and the price of lithium carbonate, used to produce lithium-ion batteries, has also come down.
The fund has enough cash to fund the 450MW it plans to build by the end of this year to reach a 1GW target, with about £200 million to spare. Just £110 million of the £335 million in debt facilities had been drawn by the end of March. But adding another 500MW again by the end of next year will mean raising more debt or equity.
Rising capacity means fatter dividends for shareholders. A dividend of 7.35p a share is being targeted for this year, which leaves the shares offering a potential dividend yield of 4.7 per cent at the current price. The idea is always to have that return covered by earnings, which were 28 per cent higher than the dividend last year.
Proving the prudence of its valuation assumptions should give the shares fresh fuel.
ADVICE Buy
WHY Building capacity should cause the shares to move higher
Helical
Pessimism towards office landlords has barely lifted since the pandemic forced what seems like a permanent shift towards hybrid working. For Helical, that translates to a stubborn discount of almost 40 per cent to the net asset value forecast by analysts at the end of last month.
Some trepidation is warranted. True, lettings activity has picked up since last year, with leases signed of more than 45,908 sq ft of space over the six months to the start of this April, generating £2.2 million in contracted rent for Helical. More importantly for valuations, those five leases were signed at 10.3 per cent ahead of estimated rental values. Rent collection has also remained solid, at 98 per cent of amounts due.
But progress is from a low base and the market is still lagging behind pre-pandemic levels. Over the same period in 2019, Helical signed deals for 101,793 sq ft of London office space worth £3.7 million in contracted rents.
Focus now is on the development pipeline, which could unlock more valuation gains. Helical has four schemes in the works, one of which is 100 New Bridge Street in central London, which is due to start on site at the end of this year. The other three developments will be part of a joint venture with Transport for London, which will have phased starts from next year until 2026.
The cost of completing the 100 New Bridge Street scheme will be about £100 million, which will be funded by raising extra bank debt. The cost of debt drawn under its £400 million revolving credit facility, reserved for properties already being let, is effectively fixed at 3.4 per cent until 2026. But the cost of financing is expected to increase as it takes on more debt.
Net debt stood at about £232 million at the end of March, including joint ventures. Based on a forecast of a 10 per cent fall in the value of the portfolio, by the brokerage Peel Hunt, this would leave Helical with a still-prudent loan-to-value ratio of 29 per cent.
Analysts think the last financial year was the bottom for NAV, anticipating an 11 per cent fall in NAV. The extent of the discount embedded into the shares looks overblown.
ADVICE Buy
WHY The size of the discount versus NAV looks too wide
