Is green fund Trig worth a long-term punt?

Lower interest rates should work in favour of infrastructure funds, as their chunky dividend yields begin to look more attractive for investors seeking income. But London’s listed green funds, including The Renewables Infrastructure Group, are still trading at a double-digit discount to net assets.
The FTSE 250 fund, which is widely known by its ticker Trig, aims to generate sustainable returns from a diversified portfolio of renewable infrastructure assets. It controls £3.4 billion in assets, which are spread across infrastructure used to generate green energy. Most of the portfolio is concentrated in onshore wind, offshore wind, and solar panels, although the fund is also building up its holdings in batteries, or “flexible capacity” assets. It has good geographic diversification, too, with assets in the UK, Ireland, France, Spain and Nordic countries, which means that risk is also spread across different weather systems, an important variable for generating electricity.
Its biggest single investment is its 10 per cent stake in Hornsea One, the wind farm off the Yorkshire coastline, which makes up 11 per cent of its overall portfolio. That is followed by the Beatrice offshore wind farm in Scotland, at 7 per cent, and the offshore wind farm in Germany Merkur, at 6 per cent. Together its portfolio is capable of generating 6TWh of clean, renewable power each year, which is the equivalent of powering 1.8 million homes.
Trig’s scale is huge and there is certainly an appeal for owning green assets that are not closely correlated with the stock market. But it has not been easy being green over the past couple of years: shares in Trig stood at a 23 per cent premium to their net asset value in 2020, according to data compiled by Morningstar Direct. But green funds have fallen out of favour in the past two years, as higher bond yields have diminished the relative appeal of the dividend yields that renewable trusts offer. The shares now languish at a 15.6 per cent discount to their NAV (net asset value).
Day to day, the fund has grappled with higher finance costs, and recently lower than expected wind generation. Power prices have been relatively subdued, Europe has improved its storage capacity and weak economic growth has also put a dampener on demand. That being said, a high proportion of Trig’s revenues come from government subsidies such as contracts for difference (CfDs), renewable obligation certificates (ROCs) and feed-in-tariffs (FiTs), which give it some insulation from movement in power prices, and more than half of its contracts have an inflation link.
For most green funds, raising money from investors has been out of the question, given the big discounts on the shares. Trig’s focus has, instead, been on managing its balance sheet: it has sold more than £200 million in assets over the past year, which has been used to push down its debt, service the dividend and fund the development of new wind and battery storage facilities.
One of Trig’s key appeals is its income, with a forward dividend yield of 7 per cent, according to estimates compiled by FactSet. But its half-year results in June showed that its dividend cover had dropped. Its power generation fell 7 per cent below budget, partly because of two cable outages — one is already fixed, and the other is expected to be fixed in the coming weeks. But this, combined with its focus on reducing net debt, meant distributable cash flows dropped to £99.9 million as of the end of June, compared with £145.2 million at the same point last year. This meant that it covered £91 million of dividends paid in the first half by a multiple of 1.1 compared with 1.7 last year. That being said, the 1.7 multiple was also when power prices were high and management has said that this multiple is likely to fall back towards its historic average of about 1.2 times.
While for many investors, Trig’s key appeal is its income, the fund does also invest for growth. Earlier this year, it bought the battery storage developer Fig Power for £20 million, which has given it a 400MW pipeline of projects. Battery storage is a relatively small part of the portfolio, although the fund is likely to diversify further into this area over time.
Its improved balance sheet means that Trig can now say it can fund its entire 1GW development pipeline from cash without raising money from shareholders by 2030.
Investors should note that Trig has two sets of management teams: its investments are managed by InfraRed Capital Partners, an asset manager which originally had a background in traditional infrastructure and is also the manager behind the HICL Infrastructure, another London-listed investment trust. Meanwhile, Renewable Energy Systems, known as Res, runs the daily management of the company.
Richard Crawford, who had managed the fund since it floated in 2013, retired this year. Minesh Shah, who was his deputy for four years, is now the lead on the fund. Shah previously worked on HICL Infrastructure.
Shares in Trig are not for the faint-hearted: the stock has already fallen 7 per cent in the year to date, even with expectations of lower interest rates priced elsewhere in the market. Some investors may take confidence in the fact that Shah bought £150,000 worth of shares in the company last month — and it is clear that the fund itself certainly believes the shares are good value, having launched a £50 million buyback programme in August.
The discount on the shares may persist for some time, and the dividend cover is not as high as other green infrastructure funds that are not paying down their debt. There is some macroeconomic uncertainty tied to the shares, but given its forward yield of 7 per cent, potential for NAV growth from its reinvestments and a mature portfolio of diversified assets, this looks a fair exchange. Appetite for renewable energy infrastructure trusts still has some way to go to recover to its previous highs, but for long-term income investors, Trig remains a solid choice.
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