We have the most resilient dividend in the sector

Minesh Shah, managing director at The Renewables Infrastructure Grp (LSE:TRIG), explains the investment trust’s refreshed strategy, how battery storage is acting as a portfolio hedge, and TRIG’s target for greater exposure.

He also discusses the impact of the bond sell-off, and the government encouraging pension funds to invest in infrastructure, as well as the action TRIG is taking to close the discount.

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Dave Baxter, senior fund content specialist at interactive investor: Hello and a very warm welcome back to our Insider Interviews series. I’m Dave Baxter here at ii, and today I’m joined by Minesh Shah, managing director at the Renewables Infrastructure Group. Minesh, many thanks for joining today. 

Minesh Shah, managing director at the Renewables Infrastructure Group: Thanks very much for having me. 

Dave Baxter: So, the Renewables Infrastructures Group, or TRIG as many of us know it, is pretty widely followed. It’s one of the big beasts of the renewables space. But there is lots of competition out there. So, what makes TRIG different? 

Minesh Shah: So, the Renewables Infrastructure Group really sits at that nexus between the energy transition as a material, very important investment theme that investors are looking for exposure to, together with providing that long-term inflation correlated total return with a strong underpinning of income.

Now, that is what infrastructure renewables investment companies are all trying to do. So, where does TRIG stand out within that?

First, our strategy is one that is diversified, that is across technologies in the renewable sector, but also geographies. This spreads risk, but it also means we can pivot between markets where we see the best investment opportunities and really arbitrage them against one another.

The second is our approach to the balance sheet. We believe we have the most robust balance sheet in the sector. 90% of our debt is fixed-rate amortising, and paid out of the operational cash flows of the underlying projects. 

Take a 20-year mortgage where you’re repaying the capital every year at an interest rate of 3.5%. I think in this market, you’d be very happy to have that and not have refinancing risk or interest rate risk. And that’s what provides a huge amount of resilience to the platform. 

The third is we feel we have the most resilient dividend in the sector, and that is because the diversification reduces risk and the balance sheet takes out that kind of macro impact on cash flows. 

Dave Baxter: Maybe briefly explain what ‘amortising’ is because it is a term, obviously it’s a very relevant term in the sector, but one that not everyone will understand. 

Minesh Shah: Amortising means that our debt terms are typically linked to the term of our fixed-price revenue contracts, often with governments. And within that period, every year in addition to the interest that is due on the loan, we will repay a portion of capital. 

What that means is when you get to the end of your fixed-price revenue contract, actually the loan balance is zero. Therefore, there’s nothing you have to refinance at that time. And, actually, it means that, for us, by the mid-2030s, we will have virtually zero debt on the balance sheet if we did nothing. 

And it means that we can look at what our revenue line looks like and respond with the balance sheet accordingly. If in the mid-2030s we have a lot more merchant or market risk, then we can respond with a lower amount of gearing. If we have a high amount of fixed-price revenues per unit we generate, then we can respond with a high amount of gearing, but it’s entirely within our control. 

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Dave Baxter: This year, interestingly, you’ve set out something of a refreshed strategy. You’ve looked to do things like sell down assets. Take us through what’s going on and how that’s progressing. 

Minesh Shah: Yeah, absolutely. So, recognising earlier this year that the share price remained weaker, for us it was important to realise capital so that we can either buy back our own shares and, therefore, retire a very high level of dividend, that’s accretive for shareholders who continue to hold, or invest in higher-returning new investment opportunities that actually exist within our portfolio. 

So, to that end, we set out an objective of realising our £400 million of capital, and we’ve made a really great start. We announced earlier this year the sale of the Beatrice offshore wind farm for £155 million. That’s 40% of the target done. We’re progressing further sales, but we also feel comfortable that the balance sheet, where it is, we could probably raise another £100 million or so of debt as well. 

So, we feel very comfortable about achieving that 400. For us, fundamentally at the Renewables Infrastructure Group, rotating the portfolio has been a part of our strategy for the last three or four years.

There comes a point where your investments have served their purpose in your portfolio and at that time it’s then right to move it on and, actually, over the last three to four years we’ve sold nearly £400 million already and [are] looking to keep selling when the time is right. 

The other objectives we set out as part of that, one was net dividend cover at 1.1 times. Importantly for us that stated after the repayment of debt that we just spoke about, we achieved that for the first half of this year and we’re on track to deliver that for the second half as well.

Then the third limb of the strategy was that internal investment opportunity we have, bringing forward 100 megawatts of new build from development into construction and then eventually into operations. We have two really exciting projects that we’re building at the moment. One is a battery storage facility in the North East, that’s due to come online in the next few weeks, and a re-powering project in the south of France.

This is one of our oldest sites and we’re taking down the old turbines, we decommissioned them all last year, and we are putting up new turbines, double the size - we’ve doubled the output of that facility. We’ve got a new 20-year inflation-linked contract with the French government on the revenue side. We’re looking to bring [that site] into operations later this year as well.

And we’ve got a much longer pipeline beyond that of other batteries in the UK, actually adding batteries to our solar sites in Spain and re-powering further sites across the portfolio as they get older. 

Dave Baxter: So, you look to get a diversified mix of assets, and that includes when it comes to technologies. But a lot of the trust is currently tied up in either onshore or offshore wind. How do you see that mix changing over time? 

Minesh Shah: Yeah, that’s right. We stated that on the technology side, we do see the benefit of greater diversification from where we are today. Ultimately, by about 2030, we’d like to get to 60% wind, 25% to 30% solar, and about 10%, 15%, maybe 20% batteries. 

Now, that’s worth remembering, if we roll back three or four years, the portfolio was 90% wind. That really reflected that wind had been the dominant technology in Europe. So, we’ve taken it down from 90% to about 77% today, once the Beatrice disposal is complete, and we’re looking to take it down to 60%. So, actually, it’s a journey we’ve been on for three or four years, and well progressed with. 

The battery storage side, equally, if we roll back three, four years it wasn’t in the portfolio at all. On the renewables side, if you don’t have a long-term contract, you’re a price-taker. The advantage of batteries is you can respond to price. So, when all the renewables are blowing and a renewable generator might capture a lower price, then the batteries can hoover up the electricity at that time at a low price. And when there’s less renewables on the system and the electricity price goes up, batteries can sell back into the grid. So, they provide you with that portfolio hedge. 

Like I said, three years ago it was zero, today it’s about 8%, and we’re looking to take it up to about 15% by 2030. 

Dave Baxter: How much risk are you now taking if you’re going into battery storage, because I suppose if we look at those dedicated funds focused just in that area, they’ve had such a roller-coaster ride in the last few years?

Minesh Shah: Yeah, I mean, batteries are more volatile revenues. That’s why over the long term, they should deliver higher returns. The challenge that some of the battery funds have had is it’s been dedicated to batteries with gearing attached to it.

The direction we’re taking is to have batteries as a meaningful, but still small, part of the portfolio. What that means is during the more fallow periods for the batteries, that you’ve still got that large operating base of renewable generator, that’s driving the coverage of the dividend. But it also means then when prices are better for batteries, you can capture those higher returns and it can drive returns for the company overall. 

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Dave Baxter: A big development in markets in recent months has been the bond sell-off. And as we learned in 2022, that can also be painful for sectors like infrastructure. How do you think the trust will fare if this continues? 

Minesh Shah: Yeah, I think it’s important to look at the cause of the increase in bond yields, the cause of why people think inflation is going to be higher, and it’s predominantly higher energy prices.

Over the medium term, so over 10 years, a third of our revenues have exposure to the wholesale, the market power price, which means when the prices are higher that does drive revenues forward. And where we have fixed-price contracts, often, particularly when they are government backed, they are also inflation linked. So, you see that higher inflation also flowing through into the revenue line over time.

On the flip side, as I said, our balance sheet, the vast majority of our debt, is actually fixed rate and amortising. So, we don’t have a lot of interest rate risk, and we don’t have a re-financing risk. So, what you see is the revenue going up because of higher power prices and inflation, but actually not a lot changes to the financing of the company as a whole because of that low interest-rate exposure. So, it should help drive dividend cover and drive the growth of the strategy. 

Dave Baxter: What big political or regulatory development should we be watching in the next year or so? 

Minesh Shah: Yeah, I mean, the way you frame it, the hiccups, I think that’s fair to say over the last couple of years, there were a few, and that partly drove sentiment towards the sector. But actually, this year, we’ve seen people really reminded as to the role renewable energy and electricity storage serves in the system, and [how it] can help to insulate economies from the macro shocks, the movement in fossil fuel prices, which we have to, of course, import into the country. 

And in return, what we’ve seen in the UK, is the government is now giving new 20-year inflation-linked contracts to sites that are repowered. Like I said, France have been doing that for a while. Now the UK is doing that. They’ve also said that they’re going to develop new contracts, government-backed contracts, for operating plants as well.

What those contracts should do for the consumer is provide that price stability i.e., the renewables don’t capture the higher prices when gas prices go up. And for us as a generator, that provides price stability because it means that we’re protected when prices go down and allows us to raise debt against it and reduce the cost of capital that invests in these projects. 

So, actually, a couple of really helpful policy developments.

The other one, interestingly, in the UK is the changes to the Pensions Bill, and where the government is encouraging pension funds to invest into UK infrastructure. 

One of the big changes we as a sector managed to achieve over the last few months was that that direction was given not just through open-ended funds, but actually listed equities, including closed-ended investment companies. It’s a sector that’s been around for decades and is a very easy way for these pension funds to immediately get access to portfolios of infrastructure assets. So, yeah, I’d say the regulatory environment has actually been more positive this year. 

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Dave Baxter: Do you think investment trusts are big enough for pension funds to weigh up? I guess one of the concerns with, say, wealth management firms has been that there’s not enough scale for them to feel comfortable in terms of liquidity and so on. 

Minesh Shah: The larger ones, like TRIG, absolutely are. Our market cap is a little over £1.8 billion. Our daily trading liquidity is six million shares, so there’s plenty of liquidity. And we’ve seen, even since the change, which was not that long ago, some pension funds coming in in meaningful volumes into the sector. I think it has, in part, helped the sentiment around the sector and driven the share price over the last few months. 

Dave Baxter: TRIG shares, like many of the trust’s peers, trade on a pretty big discount to net asset value. What effect does that have on you running the trust? And what do you think might actually tame the discount one day? 

Minesh Shah: Yeah, I mean, my principal focus is: how do we grow cash flow per share for investors? And if you grow cash flow per share, you grow dividend cover, and you grow the runway for dividend and capital growth, then the share price will respond and those discounts will close.

In the meantime, while the share price represents a 10% dividend yield, the right thing when we have the capital available is to buy back shares, retire that dividend and boost cash flow per shares for those shareholders who continue to remain in the strategy.

So, we’re absolutely mindful of the discount, it informs the hurdle rate return requirement on new investments. And while there’s a discount present, we’ll be buying back our own stock to boost those cash flows for ongoing shareholders. 

Dave Baxter: Minesh, many thanks for your time. 

Minesh Shah: Thank you for having me. 

Dave Baxter: And thank you for watching. As always, I hope you found it useful and interesting. Do let us know what you think in the comments. And if you’re a fan, hit the like button and the subscribe button. Thanks and take care.