Article from Investment Trust Newsletter April 2024.  For full access to all articles and back copies, please SUBSCRIBE HERE.

STOCKBROKERS’ RESEARCH

Panmure Gordon published a detailed chartbook last week covering discounts and z-scores (measuring the variation in discounts) across the sector.  The broker found that discounts have on average widened by 2.8% over the past 12 months across the entire investment trust universe, with the proportion of trusts trading at a premium falling to 4.9% from 8.8%.  The average discount appears strongly correlated to short-term gilt yields, which perhaps explains why discounts failed to narrow in the first quarter despite positive good NAV performance.  Curiously, discounts narrowed for Chinese investment trusts as share prices held up better than falling NAVs, and the reverse happened for Indian investment trusts where share prices did not keep up with rising NAVs.  

A quarterly round-up of the infrastructure and renewables sector from Deutsche Numis highlighted the steep share price falls across the range since September 2022, averaging 30%.  Only 3i Infrastructure (3IN, 326p) has been immune from the fall, with the worst declines from Gresham House Energy Storage (GRID, 42.3p), Harmony Energy Income Trust (HEIT, 41.2p), and Digital 9 Infrastructure (DGI9, 22.5p).  There have been a number of specific problems, with the industry dynamics in the battery storage sector in particular, but more broadly, stronger gilt yields and falling power prices have been unhelpful for returns and for demand.  Discounts have generally widened.  The broker says though that outside of the battery sector, dividends are generally covered by renewables trusts even at lower power prices, so there is room for “some reassurance and optimism” from recent results announcements.  Many yields are high, between 7% and 11%, and based on their analysis of recent asset sales, the broker believes that stated NAVs are realistic and not overstated.  

UK power prices are an interesting topic, as there has been a lot of commentary on falling prices and the potential impact on future returns.  Power prices averaged around £40/MWh from 2015-2020, and then surged hugely as we all know from our domestic power bills.  The price peaked at an average of £204/MWh in 2022, averaged £93/MWh last year, and has come down to £66/MWh so far this year.  Future forecasts suggest average prices of £64/MWh for 2025-2030, £55/MWh for 2031-2035, and £52/MWh for 2036-2040, so a falling trend.  Of course individual managers can mitigate short-term changes by hedging though, and in fact the direct impact on NAVs seems to have been muted.  Bluefield Solar Income (BSIF, 99.15p) has been particularly successful in its pricing strategy, locking in relatively high prices for its output.  Deutsche Numis believe that at current discount levels the implied NAV returns across most of the renewables sector look attractive.

Winterflood issued a note on abrdn Private Equity Opportunities* (APEO, 533p) on 25th March.  APEO is largely a fund-of-funds private equity investor, with around 20% of assets also in direct investments, and the trust has a decent longer-term track record, though lacklustre of late.  Back in October it was announced that abrdn’s private equity business was to be acquired by Patria Investments, a Latin American global alternative asset manager with US$38.4bn of assets under management. The management team and investment approach at APEO are expected to remain unchanged following the sale, which is expected to complete in the first half of this year. Winterflood say the move to Patria “is a positive development in our view, as it removes a certain degree of uncertainty overhang, which had loomed since it was reported that abrdn were looking to sell the business. In particular, we are pleased to see the onboarding of the entirety of the European team, which will allow for continuity in APEO’s management and the maintenance of key investment relationships. We expect Patria’s resources to be additive to the proposition, particularly its sizable distribution network, which includes 12 of the 20 largest global investors in private equity, and wider resources, with almost $40bn AuM.”

Investec has issued a ‘buy’ note on Pantheon Infrastructure* (PINT, 76.4p) following the trust’s annual results for 2023.  The NAV at 31 December 2023 was 106.6p per share which is flat compared to the last published NAV at end-September, but was after the payment of the 2p interim dividend. Investec calculate that the NAV total return was 11% over the year, ahead of the trust’s 8%-10% NAV total return target set at IPO. They say “we are encouraged by the company’s performance to date and strongly believe that the investment manager has constructed a portfolio of high-quality infrastructure assets with blue-chip sponsors that is diversified across sectors and geographies. The share price is currently trading at an all-time low which we do not believe is reflective of the fundamental attractions of the company, and at a time when these assets are proving their worth and maturing through the J-curve. The portfolio weighted average discount rate is 13.6%, and given the material discount to NAV of 31.0%, the implied discount rate at the current share price is in excess of 17% which we believe represents an outsized prospective return.” 

Asterisks in this section indicate that the trust is a client of the stockbroker providing the research.

Quick Subscription Link - Investment Trust Newsletter