Charles Jillings, CEO of Utilico, energized by strong economic momentum across Latin America. Watch the video here.
To provide shareholders with regular, sustainable, long-term dividend income and to preserve the capital value of its investments over the long term by generating exposure to infrastructure debt and/or similar assets.
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All - the following may help explain the 'discrepancy' in H1 profitability v H1 2022. The key issue is valuations - actual loan interest on the portfolio has increased. I assume the risk premium being applied to asset discount rates is increasing - leading to the quoted valuation loss.
" The Company generated (H1 2023) operating income of £35.6 million (31 March 2022: £117.6 million) including loan interest income of £40.9 million and net unrealised valuation losses on investments of £17.4 million (31 March 2022: loan interest income of £35.8 million, net unrealised valuation gains on investments of £72.0 million).
" The comparative period last year included material upward revaluations resulting from significantly increased electricity price forecasts; this period saw significant volatility but with lower short-term prices and lower long-term forecasts than last year. Net gains on derivative financial instruments at period end were £11.9 million (31 March 2022: £4.2 million), reflecting the electricity price hedging arrangements which locked in attractive price levels for the Company." SB
My reading of it is that falling electricity prices lead to a higher discount rate to the borrower and vice - versa..
This might help ... from my understanding they are not bonds in the normal sense of the word. 50% of the loans are senior debt and the remainder not so although half the investments are inflation linked to a degree. It take some thinking about thou that is for sure...https://cdn.graviscapital.com/graviscapital/files/GCP-INFRA-Update-Webinar-May-2023-1.pdf
It is also not obvious to me at all how electricity prices feed into the fair value of those bonds in such a big way, unless they are very complex hybrid instruments; in which case, this is a more complicated and much riskier investment than it seems.
"Good assessment Trot. Although, thing I can't understand is SP seems to have inverse relationship with interest rates. "
That is exactly my question. If interest income has not dropped, are we meant to believe that the huge reduction in profit (from 108m -> 25m) is due to the change in the fair value of bonds under IFRS? That is a huge drop. It's not completely obvious and needs explanation before this becomes a no-brainer.
Fwiw I received an email from British Gas yesterday explaining energy prices are now falling... So if this is inversely correlated to energy prices we should see some recovery in the price
Good assessment Trot. Although, thing I can't understand is SP seems to have inverse relationship with interest rates. Perhaps just because rates have only risen inline with energy prices but you'd think the protected nature of the income from an inflationary environment would be attractive (unless of course all bond default). Still, seems oversold and I am buying at these levels
Trot... that is an excellent explanation of the likely drivers here. Thanks for posting
Cane Toad, There hasn't been a fall in the interest received. As you state, there has, instead, been a fall in the fair value of the bonds. The exact dynamics are unclear but, given that the returns on the bonds are generally fixed (some are inflation linked) and that the fair value of the bonds can both rise and fall, then I'd suspect that the fair valuation of the underlying bonds is affected by electricity prices in one of two ways:
Firstly, the risk of borrowers defaulting. That risk seems fairly self-evident to all.
Secondly, the expected timing of future bond repayments. If the bonds have flexible payment terms then lower electricity prices could result in longer payback periods and vice versa. Likewise, longer payback periods will result in the fair market value of the bonds being lower and vice versa.
We also have to factor in the effect of inflation on the discount factors being applied. Under IFRS, it's my understanding that the fair market value of the bonds is based on the net present value of expected future cash flows i.e. the discounted value of those future cash flows. The higher the discount factor the lower fair market valuation of the bonds and vice versa. This doesn't, of itself, affect the amount of money paid back on the bonds and, as such, the discount is therefore unwound over the remaining term of the bonds.
Clearly I am not understanding the nature of the underlying assets here. For a bond fund, the only way for profit to drop by this magnitude (from 108m -> 25m) would be if the value of the bonds themselves crashed by a similar amount OR if they defaulted or otherwise stopped paying coupons. I doubt that either has happened.
Given that this is primarily a debt fund, I cannot yet get my head around the enormous dependence on electricity prices. Bonds simply do not move in this way:
"Profit for the period of £25.8 million (31 March 2022: £108.9 million) primarily reflects the impact of lower electricity prices compared to the prior period."
No other bond funds that I hold see this dependence on the underlying businesses. That is their attraction...
This may help a little...
https://quoteddata.com/2023/06/discount-opportunity-gcp/?amp=1
No its not. Read notes 3 and 11 again. Their revenue aren't linked to electricity prices. The fund lends money (fixed-income debt instruments, in some cases with elements of inflation protection, or other investments with a similar economic effect) to businesses primarily operating in the energy sector and, as such, the risk of default on those loans is linked to electricity prices.
Ok, this is more complicated than I thought. It's not really a debt fund. Their revenue is directly linked to renewable power sales. This sounds like the worst of both worlds, without any real control over the assets but beholden to them. And if power prices drop further, so will their revenue.
I thought this was primarily a debt fund, holding loans and bonds rather than physical infrastucture assets? if so, why is the management blaming the big drop on lower electricity prices? They clearly must have a significant amount of equity in these projects as well, which means it's not a debt fund...
This might be one of the best value stocks to buy. 9% yield and below NAV, great for along term hold. Just keep reinvesting dividends until it recovers.
Yummmmy!!!!
Μωρή παναθα από το στόμα σου και στου θεού το αυτί
Bought some today. They can’t go much further down surely ?
The markets have priced in base rates upto 5.75/6% now. One of these days we might just get a surprise when the inflation figures are announced…..lol
Some good inflation beating yields about now..keep buying. The list gets bigger.
There we have it. 9%. 2 x current BoE interest rate. Makes you wonder what doom market is starting to price. Bonkers. SB
Some useful feedback all - thanks for your contributions. It is pretty clear there is strong link between the increasing price of govt debt (gilts, bonds) interest rates and impact on infrastructure yields. That said - the risk premium is way excessive imo. Monetary policy is all over the place in the UK at present - I can only imagine Jeremy Hunt is to some extent fortunate he is not making the calls on interest rates - although all too late from Threadneedle Street. I thought GCP had priced in a mini armageddon when it went started to yield 8% - but to be approaching 9%?. And talk of 10%. Although that is the direction of travel it is uncomfortable to see the conclusion of utter incompetence from the BoE. I am a holder here - and remain so - accepting its going to take some pain to get the economy back in order and turn the tide on the share price - I'm on an 8% yield so will take that in the meantime despite the capital loss. Full employment - if those claims are real - will not help. The general population seems to be spending like its going out of fashion - despite everything you read about household budgets, cost of living, energy, mortgages etc. As for GCP - there must be some grey matter at work considering its options - scale up the buy back; go for a tender offer ie take shares off market and increase dividend/yield. The fund discount is now 30% - several hundreds of £millions. Or sit tight and see where it all ends up. Quite a mess all round. SB
Absolutely agree 4% + over SONIA looks harsh
However why is GCP trading at such a large premium to Sonia compared with some other bond proxy type stocks which are around 2 to 3% over Sonia? GCP seems out of line with other bond proxies, so others may fall in price or GCP May rise in price to make yields comparable?
"means a price of 70p."
Seems a fair target - smaller companies in the same sector have already been hammered. Enjoy the dividends and trade the noise if you can.
Good Luck.