UK Edition
A new 45pc tax does not sound like great news for any business. But a windfall tax at this level is what the Government announced for renewable energy generators in the Autumn Statement last week. We have tipped a handful of these generators, some of which are structured as investment trusts, here. How big an impact on their value and dividends can we expect?
Let’s look first at Greencoat UK Wind, rated a buy in July 2020 and in May and July of this year. The good news here is that, according to analysts at Numis, the stockbroker, the trust’s valuation will not be affected by the windfall tax.
This is because the tax will apply when electricity is sold for more than £75 per megawatt‑hour and Greencoat’s “valuation model appears to include [a] power price below £75”, Numis wrote after the Autumn Statement. (It said the same of Next Energy Solar, which has not been tipped by this column.)
This is not to say that Greencoat will pay no windfall tax; rather that it has valued its assets on the assumption that electricity prices will be less than the threshold for the tax. If it sells its power for more than £75/MWh it will indeed be liable to pay the extra tax but its revenues will also be higher than it expected when it valued its assets.
Numis estimated that higher electricity prices were likely to have added 15p a share to the fund’s net asset value, which makes the broker’s NAV estimate almost 10pc higher than the most recent number announced by the trust, 155p as at Sept 30, despite the windfall tax.
Numis’s new figure of 170p compares with a current share price of 154.1p, although the broker did admit that it had found it “very challenging to reach an accurate NAV given the moving parts, including varying power price methodologies applied by managers and the differing hedge positions”.
It added: “While we believe the uncertainty around the extent of government interference has made investors more nervous, we believe the long‑term investment case for listed renewables remains intact.
“With the confirmation of the windfall tax in the Autumn Statement there is now more clarity, and assuming our initial post‑budget NAV estimates are correct (crude though they are), we believe the impact on NAV is less than the market had been anticipating in many cases. We believe there is scope for some discounts to narrow.”
Bluefield Solar Income, tipped here in October last year, has already published its own figure for net asset value that takes account of the windfall tax. On Tuesday it said the tax would reduce its NAV by 14p a share, relative to a figure for Sept 30 of 144.6p.
However, this significant fall was largely offset by the fund’s decision to cancel a contingency it had previously put in place to account for the uncertainty in power prices to the tune of 11p a share. The combined effect is that the NAV falls by just 3p to a current (unaudited) figure of 141.2p, compared with 140.4p (audited) at the end of June and a current share price of 137p.
For JLEN Environmental Assets, which we tipped in June, we need to go back to brokers’ estimates because the trust has not so far published any reaction to the Autumn Statement.
Numis put the effect of the windfall tax at a 3.6p hit to NAV, more than cancelled out by a 3.55p rise thanks to changed assumptions about power prices and 1.5p from the effects of inflation, relative to the trust’s reported NAV of 123.1p in June. Numis’s new estimate of 124.6p compares with a share price of 126.8p.
In no case is the dividend expected to be affected by the windfall tax. We’ll hold on to all three trusts.
Questor says: hold
Ticker: UKW, BSIF, JLEN
Share price at close: 154.1p, 137p, 126.8p
Update: Digital 9 Infrastructure
We tipped this trust only in July, but unfortunately it has managed to lose 25pc of its value in that time. Two things are to blame in this column’s view: the difficulty faced by all income funds in competing with the appeal of gilts, whose yields rose dramatically in the wake of the mini‑Budget in September, and the unexpected departure this week of two of the trust’s managers.
Such a big change in the management of a new trust (it listed last year) was bound to unnerve investors. Fortunately, in view of the fund’s youth, we advised readers to commit only small sums and on that basis we will hold.
Questor says: hold
Ticker: DGI9
Share price at close: 84.2p
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