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To invest mostly in operating UK wind farms with the aim to provide investors with an annual dividend that increases in line with RPI inflation while preserving the capital value of its investment portfolio.
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Anyone selling UKW should really have sold out above 150p.
I'm in for the long haul & hopefully this is another safe dividend bet for retirement (I'm 54) & i'll add more shares in my ISA if the SP goes to 130p or below when my monthly payment is made.
As much as I love thos share, as soon as the ex dividend date comes on 15/02, I'm selling up.
I can only see the share price pulling back while they buy back their own shares, and then they may look to raise funds are start investing again in new projects.
I've been invested here for a long time, and I've picked up a few grands worth of dividends over the last 5 years, but I have my own commitments with cash this year, and I need this money.
This company has a great future, and I know later down the line I'll regret selling out, but share investing is a financial hobby and now I need my £30k back.
ATB folks.
Apologies -I woke up, thought is the net cash is low because of buybacks, then read the budget update (0.9) as buybacks and thought that the numbers looked more in keeping with what I was expecting for net cash, it will teach me to have breakfast and find my glasses before I post anything!
I agree the 0.1 is most likely because they have purchased beneath the nav.
However, this then leads back to why was net cash so low for the last quarter? I thought that mentioning production was 13% down for year was a bit of a deflection as the results were all about Q4 where wind speeds were around average.
P.S. Oops, that should have been "... cash spent on share buybacks is not deducted from..." If it is, then I think they've made a mistake, since such a deduction would make no sense, as far as I can see.
Buybacks at NAV would have no effect on the NAV per share. As they've been done below NAV they've increased the NAV per share, and I believe that's recognised by the listed +0.1p for 'Share buybacks'. I'm pretty sure that cash from buybacks is not included in 'Net cash generation'.
Actuary63,
If we accept the assumptions in the NAV model, then reinvestment of surpluses should cover the replacement of existing assets. Alternatively (if accretive investment opportunities are not available) the surpluses could be paid out as extra dividends, allowing shareholders to invest elsewhere to replace the eventual loss of dividend income as the assets wear out.
Personally, I think the best way to value UKW shares is to look at its DCF NAV calculation, and ask whether its assumptions are reasonable. If they are, then the expected return on the current assets is 10% p.a. Any accretive investment would be a bonus on top of that. (Of course, with this approach I have to assume that they've done their DCF maths correctly, as I'm not going to check it myself!)
It is a topic that comes up at some of the conference calls.
June 2022 report pg12 (it is in others).
'Over the life of the portfolio, fixed cashflows are forecast to contribute 50 per cent of the total DCF value
(50 per cent merchant).'
Monkshood,
PPAs are 'merchant pricing', but it looks like I was mistaken in assuming that PPAs are at fixed (predetermined) prices. They can be 'variable', which I think means linked to current market prices.
I don't know whether the market prices they are linked to are 'spot' prices. But this link shows spot prices over the last year:
https://tradingeconomics.com/united-kingdom/electricity-price
FWIW the spot prices in Q4 look like they were no lower than in the previous 2 quarters.
Unless they used new money to replace the existing turbines then it would not affect depreciation. In the past they have not replaced assets but increased them. I think that they have started to show depreciation because they have either been asked to for transparency or there is a tax advantage in doing it this way. 8+ p per year would write the existing assets off over twenty years which seems reasonable.
I think what I was missing was viewing net cash as income from generation (less costs) - which historically is what it was - but, they now have buybacks - so is the net cash lower by the amount of the buybacks?
It would make sense, and the numbers would be more in line with past income (3.7+0.9) and over x2 div cover.
What is not clear, is if this value is inflated because the shares are being bought at a 10% discount, the 0.9 may be reasonably inflated by 10%, still this is a marginal difference.
It is a shame they do not add a little more commentary to the Factsheets.
Hello Tichtich,
A consequence of not being able to issue more shares is that UKW (and other renewable trusts) be will less able to invest in new assets to replace those that are ageing and reaching the end of their useful lives. If this continues, the cash earnings will eventually fall and shrink to zero when all the assets are scrapped.
This doesn't mean shareholder returns will be less than forecast - but it does mean part of the dividend income will effectively be a repayment of capital.
Perhaps this explains why the accounts are now showing depreciation as a separate item. If old assets are not being replaced, the average useful life of the asset portfolio would be falling.
However, I am inclined to believe that the share price discount will revert back to a premium when interest rates fall, which will allow the trust to issue new shares to buy new assets.
They aim (used to aim?) for about 50% merchant pricing, it is why they did better than some of the others when the energy crisis hit as they had less forward sold.
Thanks for your analysis. I find it hard to draw any conclusions without an explanation of why the numbers are what they are. Why did the cash income drop so much in the last quarter, if it's not low wind? Could it be a big fall in prices? I don't think UKW sells much (or any?) of its output on the spot market. I think the prices are all either RPI-linked or on PPAs (power purchase agreements) lasting about 3 years. Did some big PPAs suddenly come to an end? Or is there a big time lag between UKW providing the power and receiving payment, in which case maybe the drop relates to the poor wind in Q2? I don't know.
Where does the depreciation number come from? The NAV is calculated by a DCF model, and I suspect the depreciation number is just the residual change in NAV that can't be explained in any other way. If so, it's a rather theoretical figure, not reflecting the actual deterioration in the assets, and I suspect it could easily change significantly from one quarter to the next. That said, perhaps we should be concerned by the fact that the NAV would have dropped quite a lot if it hasn't been for the REGO windfall.
I can't see any underlying reason why the Q4 results should be much worse than the rest of the year, so I'm inclined not to worry too much about these numbers. But I hope someone will ask about them at the presentation, and I'd be very interested to know UKW's response.
Some number behind what I was saying.
Why are they now showing depreciation and why has it stepped up so much?
Data in nav/per share form Factsheets.
June - depreciation 1.6 for 6 months ( not specifically mentioned in the factsheets before this) -net cash 8.8 (so av 4.4 per quarter), divi 4.1 for half year
Cash less divi and depreciation(for half year) 8.8-(4.1+1.7)= +3.0
Sept 2023 depreciation 1.7 for 3 months, net cash 5.2, divi 2.2 5.2-(2.2+1.7)= +1.3
Dec 2023 depreciation 2.1 for 3 months, net cash 3.5, divi 2.2 3.5-(2.2+2.1)= -0.8
March 2024 depreciation 2.2?* net cash?, divi 3.43 ?-(3.43+2.2) need net cash >5.63
June 2024 depreciation 2.2?* net cash?, divi 2.5 ?-(2.5+2.2) need net cash> 4.7
One has to assume depreciation is fixed (beyond increasing with the number of assets), as are the divi’s, so they will need almost 2x div cover (4.7) if the nav is not to drop each quarter after Q2 without other factors coming into play (and a one off net cash greater than 5.63 for Q1).
Wind speeds actual / long term average
2023 -Q1 9.2/9.8 Q2 6.9/8.2 Q3 8.0/7.8 Q4 9.1/9.2
Fair to say that the 2nd quarters wind was notably low but the rest was close to the 20 year average and Q4 should be reasonably representative of income (and this is with energy prices still relatively elevated).
* increased this by 0.1 for Kype Muir.
Any thoughts?
I agree with most of what you say (including about the REGO's), but the wind speeds were average for the quarter so it is hard to put reduced income for the quarter down to this. They also have the London Array contributing as well now so I was expecting an uplift from this.
They have a conference call with the Annual Results soon so there will be an opportunity to quiz them on it then.
Although I think UKW is doing well, all thing considered, I don't think things have got so much better as to justify the extra dividend increase (over RPI). I think they should have stuck to the policy of just increasing by RPI, and used the extra money to reduce their debt (which has gone up a lot this year).
When they announced the extra dividend increase and the share buybacks, the reason they gave was that they wanted to reduce the discount to NAV at which the shares are selling. Why do they want to reduce the discount? Apparently so that they can issue more shares. But I'm not sure I want to see more shares issued. And I'm happy for the shares to sell at a discount. It makes the share buybacks more cost effective, and I might want to buy more shares myself in the future if the price is right.
@Monkshood
I don't think you can infer much from a single quarter's figures. They vary a lot from quarter to quarter. The cash generation figure was pretty low this quarter. Hopefully that's a temporary effect (due to low wind?).
I'm not sure, but I reckon the negative amount for inflation is due to inflation having fallen. When the rate of inflation stabilises, that should go away (or turn positive if the rate increases again!). A sustained fall in inflation rate and interest rates should lead to a reduction in the discount rate, which would increase NAV. So I reckon there are a lot of things jumping up and down on a temporary basis.
One thing that struck me is the significant effect of allowing for REGOs. I've just read up about these. It seems they can be sold separately from the renewable electricity that gives rise to them. So companies are buying them for greenwashing purposes, and that's caused them to have significant market value. If Ofgem clamps down on that practice (which they probably should), that value might disappear.
Just wish I had more!!
Does anyone know why the Hornsea 1 debt has increased by £13M over the quarter - has it been refinanced??
The income clearly covers the divi. However, this quarter divi distribution plus the depreciation was greater than the income . As these are the more 'consistent variables' (and the divi's are also increasing) then will need to get used to a constantly falling nav going forward?
Less concerned by price/inflation impact on nav as these will normalise over time, plus will be in part, be countered by the change in the discount rate.
Is there something I am missing?
Quarterly divident increased to 3.43p. Fantastic news. Well done UKW.
Onwards and upwards.
Hi. UKW is my largest holding, so I obviously think it's good. The 2 main risks I can think of:
1. In the long term there might be a surplus of intermittent electricity and/or government is unsupportive, leading to lower prices for UKW's electricity. But UKW's NAV estimate already assumes the electricity price will fall 2% p.a. in real terms over the long term, which seems pretty conservative.
2. Wind turbines wear out sooner than expected and/or maintenance/repair costs become excessive.
Both of these are longer term risks. In the shorter term it seems pretty safe.
This came up on my radar, so have got some in my SIPP. They seem to have good dividend cover and growth. What is the downside/risk here? They seem pretty solid