Greencoat Renewables plc
20th August 2020
Share price: €1.26
Dividend yield: 4.9% (projected)
P/E: N/A
Net Asset Value per share: €1.022 as at 31st July 2020
You may have noticed a rather hefty charge on your electricity bill, described as a 'public service obligation'. This is a levy on the consumer that is designed to finance the move towards generating more of our electricity from renewable sources, and less on traditional fossil fuels - in this case, natural gas, which is the main component used for electricity generation.
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Some of the proceeds from this levy is subsidising companies like Greencoat Renewables plc, which is the second largest owner of wind farms in the Republic of Ireland. Greencoat owns a total of 19 wind farms, the majority of which are in the Republic of Ireland and a few new additions recently in France.
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The government subsidy is by means of an indexed floor to the power price for 15 years. This guarantees a profit margin for Greencoat Renewables plc (GRP), and the guaranteed price in 2019 was €80 per MegaWatt-Hour (MWh) compared to a market price of €50, a whopping premium of 60% over market price. The guaranteed price has been reduced to €74 per MWh for the auction of new projects in 2020, but that is still an attractive price.
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But what happens after 15 years, when the price reverts to the market price, and assuming that this is still substantially lower than the previously guaranteed price? GRP is effectively pricing this in, when it revalues its wind farm assets quarterly. This revaluation is done on a discounted cash flow basis, so account is taken of the future reduction in price levels. Of course, there are plenty of assumptions that one is forced to make in doing a discounted cash flow analysis. This is scrutinised by the auditors, and I didn't spot anything unreasonable in the note to the accounts for this crucial item.
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GRP shares have outperformed the ISEQ index by a substantial margin in the past two years, and this gives the shares a very strong buy signal in terms of technical analysis. Also, GRP had two major share placings in 2019, one in March at a price of €1.055 per share and the other in December at €1.13. Normally, one major fund raise through a placing of shares would depress the share price, never mind two. But in this case the shares have galloped ahead.
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That indicates to me that investors just can't get enough of this stock. In 25 years of stockbroking, I only remember one case where the share price of a company strengthened significantly in the immediate aftermath of a major placing or rights issue (which normally depresses the price due to the extra supply of shares). That was in the case of Grafton Group, during the go-go years of the celtic tiger boom, and that stock more than doubled in the next 12 months (March 2003 rights issue when the shares were around €3, and the price rose to more than €6 by April 2004).
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The technical indicators therefore point to a major upward break for this stock. The funds raised in the placings will be used to expand into continental Europe. This involves higher risk, in dealing in markets outside of Ireland. However, GRP can point to a good track record in Ireland, and EU countries are under pressure to generate more of their electricity requirement from renewable sources. Indeed, there will still be growth opportunities for GRP in Ireland, as the current government is aiming to generate 70% of our electricity requirement from renewable energy (currently at around 40%) by 2030.
GRP is, in effect, an investment company and contracts everything out. That is why the price to earnings ratio (P/E) is not applicable. Instead, it is the net asset value that indicates how well the company is doing, together with the dividend yield. The latter is reasonably well covered at 1.7 times cash flow generated from operations. The investment management is done by a separate entity called Greencoat Capital. The latter selects the wind farms to invest in, along with some minor solar projects and GRP provides the capital, some of it in the form of equity and some in the form of loans. The wind farms are operated by various electricity generating operators such as the ESB, SSE and some other smaller entities. The spectacular growth in the Irish market for wind power is illustrated by the recent entry of the French giant, EDF, into our market.
The GRP and Greencoat Capital people are not doing anything particularly difficult or innovative themselves. They are merely taking advantage of a hugely attractive subsidy scheme being offered by a government under pressure by the green lobby to demonstrate its 'woke' credentials. But in the words of Warren Buffet, a company with mediocre management that is in the right place at the right time will do much better for shareholders, than a brilliant management that is in the wrong place at the wrong time.