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22. Uncovering Trusts – Gresham House Energy Storage Fund (GRID)
72 Plays30 days ago
In this episode, Edison analyst Joanne Collins discusses Gresham House Energy Storage Fund, which seeks to provide investors with an attractive and sustainable dividend over the long term, by investing in a diversified portfolio of utility-scale battery energy storage systems located in the UK and Ireland. In addition, the company seeks to provide investors with capital growth through the reinvestment of net cash generated in excess of the target dividend. Joanne discusses the recent adverse market backdrop for the BESS sector and GRID’s response to these challenges, while also outlining the very supportive long-term fundamentals of the sector. Moreover, she explores GRID’s recently announced three-year plan, as well as the prospects for resumed dividend payments.
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About ‘Uncovering Trusts’
'Uncovering Trusts': is a podcast run by Edison analysts released every two weeks. Subscribe to hear analyst interviews on how investment trusts maximise returns while managing risks for investors.
About Edison:
Edison is a content-led IR business. We believe quality investment content should inform all investors, not just brokers. Our mission: engage and build bigger, better-informed investor audiences for our clients.
Edison covers 50+ investment trusts, read about them here: https://www.edisongroup.com/equities/investment-companies/
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Transcript
Introduction to Uncovering Trusts and Guests
00:00:06
Speaker
Welcome to Uncovering Trusts, a podcast by the Edison Group, a content-led IR business integrating analyst content, digital targeting, and investor engagement. Each tips episode will uncover the distinct features and latest developments that were selected listed investment company. So tune in to find interesting investment ideas and to stay on top of what is happening in the investment company sector.
00:00:30
Speaker
I'm your host, Will Manuel, and today I'm joined by Joanne Collins, an analyst at the Edison Grid, who will talk about Gresham House Energy Storage Fund, known by its ticker, RID. Joanne, thanks for joining us. Will, hello. Thank you.
GRID's Investment and Market Position
00:00:46
Speaker
So let's start by providing an introduction to Grid for those listeners less familiar with the fund.
00:00:53
Speaker
Of course, GRID invests in utility-scale battery energy storage systems in the yeah UK. These batteries are known by the acronym BESS. GRID is the yeah UK's largest owner and operator of BESS with an operational portfolio ahfolio of 20% of the market. This is significantly greater than the next largest owner, which holds less than 10% of operational projects.
00:01:17
Speaker
The investment case for these batteries rests on the integral part they play in the global transition to renewable energy, as best store energy generated from intermittent sources such as solar and wind until it is required. Demand for these energy storage systems will continue to grow in parallel with increasing solar and wind power generation and the trend towards electrification.
Revenue Streams and Sustainable Appeal
00:01:44
Speaker
regenerates some of its revenues by supplying this stored energy to the national energy system operator, known as NSO, under contract. This year it also struck a tolling arrangement to supply electricity directly to octopus energy under a long-term contract. And other revenue is derived from trading energy at times of peak demand. um Great. That's very interesting. So who's likely to find this trust most appealing?
00:02:12
Speaker
Greeter is most likely to attract the attention of those seeking exposure to real assets which are otherwise inaccessible, especially to retail investors. Such exposure also provides access to the very significant growth prospects of the renewable energy sector as the UK strives to meet its net zero target.
00:02:32
Speaker
Greed also offers investors diversification benefits away from conventional yeah UK and global equities. And those focused on sustainable investments will appreciate the key contribution Greed is making to the transition to renewable energy.
Sector Challenges and GRID's Response
00:02:49
Speaker
Right, so I see the battery energy storage sector has been under quite a bit of pressure over the past 18 months. um Can you let us know what's been going on?
00:02:58
Speaker
Yes, the whole best sector has had a tough time since the middle of 2023. Revenue conditions deteriorated due to a combination of a sharp fall in gas prices and the slower than expected utilization of battery services by Neso on its new energy trading platform. This placed significant downward pressure on the share prices of grid and its competitors. Right, I see. And and how has grid responded to these developments?
00:03:26
Speaker
During the first months of this year, the company took several steps to conserve cash, stabilize revenues and increase capacity. These measures included the suspension of dividend payments and reduction in debt to reduce associated fees. Grid's manager also concentrated on commissioning the company's 2024 project pipeline and increasing the capacity of several of its already operational projects, so-called augmentations.
00:03:52
Speaker
These measures have proved effective. ah Revenues began rising in Q224 and have improved steadily since, helped by an improvement in trading conditions.
Octopus Energy Agreement and Income Stability
00:04:02
Speaker
2024 earnings are expected to exceed their 2023 level of £26m and earnings are forecast to ah recover strongly next year to at least £45m and possibly as high as £55m.
00:04:20
Speaker
assuming current trading conditions and based on Grid's current operating portfolio. This is due in part to the fact that Grid has reached a key milestone of one gigawatt of operational capacity up from 740 megawatts in early 2024. And the tolling agreement with Octopus Energy will also contribute to higher revenues.
00:04:46
Speaker
Can you tell us more about this agreement with Oxford percentage and why it's significant? Sure. The agreement fixes revenues on more than half of grids.
00:04:57
Speaker
portfolio out to Q3 2026. This provides a greater degree of income certainty, which should be a significant comfort to investors as it reduces the risk of unexpected revenue declines of the kind that unsettled the best sector in late 2023 and early 2024.
00:05:16
Speaker
The agreement with Octopus Energy is a landmark deal. It's the largest deal of its kind in the UK market. And both Grid and Octopus are so pleased with the arrangement that they're exploring the possibility of expanding it.
Future Growth Plans and Capacity Expansion
00:05:30
Speaker
Right. And I think Grid has also announced big plans for the next three years. ah So what's in store for the company over this period?
00:05:39
Speaker
Yes, that's right. In November, the company announced a three-year plan intended to triple earnings from an estimated minimum of $45 million in 2025 to $150 million in 2027 based on current trading conditions. The plan also features further significant increases in capacity via more augmentations to existing projects and a new UK pipeline, which will add a further 680 megawatts of new projects over 2026 and 2027. As I said, Greed is also considering further developing its relationship with Octopus Energy and possibly other tolling arrangements as well. And it's looking at additional ways of accessing the market, although details are so far limited. nine um and And how does Great Clients have funded future growth plans?
Debt Financing Strategy and Market Flexibility
00:06:32
Speaker
Funding is expected to come from a new kind of arrangement, with debt-sized off long-term contracted revenues such as those generated by the Octopus Tolling deal. Such revenue-based debt financing arrangements are a well-established model used widely in project financing.
00:06:50
Speaker
GRID is currently in negotiations to refinance all of its existing debt via this kind of facility, which has the additional benefit of lowering borrowing costs thanks to floating rate terms set in a declining rate market. Negotiations are expected to be completed in the first quarter of 2025.
00:07:08
Speaker
However, the manager intends to keep a portion of the company's asset base uncommitted to debt servicing to preserve the flexibility to capture revenue upside by trading opportunities that emerge during periods of high energy price volatility.
Dividend Reinstatement Plans
00:07:25
Speaker
and So I'm guessing that the recent positive developments mean there may be scope for grids to resume dividend payments? Yes, that's absolutely correct. When the company announced its three-year plan, it also indicated that subject to the successful conclusion of the refinancing negotiations, it plans to reinstate dividend payments from Q325 in respect of the second quarter of that year. These divides will dividends will be fully covered after costs.
00:07:53
Speaker
The company hasn't yet discussed the size of the reinstated dividend, but if earnings reach their projected levels next year, cash flow per share net of cost will be in a range of 4.5 to 6.2 pence per share. This suggests the possibility of a reinstated dividend of a similar size, which would be somewhat lower than the full year dividend of seven pence ah per share paid in respect of fiscal year 22 and the two prior years.
00:08:25
Speaker
So um it grows big plans to add to its capacity by pipeline developments and further augmentations.
Potential Equity Investment and Valuation
00:08:32
Speaker
What else should we be looking out for? Well, Grid is also negotiating an equity investment it in its Glastonbury site. This deal is expected to close in Q125 and would potentially provide funding to lift this project's duration from less than one hour to four hours, making it Grid's first four-hour project.
00:08:53
Speaker
Glastonbury currently has 38 MWh of operating capacity, but improvements in best technology mean the same site can now accommodate 220 MWh, an augmentation that will offer double-digit returns according to Grids Manager.
00:09:10
Speaker
This investment also has the potential to confirm Grid's valuation methodology, which would give investors more confidence that the company's current NAV is a realistic estimation of its true value. Grid's manager says similar co-investment opportunities exist across its whole portfolio.
00:09:28
Speaker
Another potential avenue of expansion is the overseas market. Before the recent challenges, Grid's manager was exploring investment opportunities in the US and elsewhere. And at the recent Capital Markets Day, he indicated that he would revisit these plans once next year's proposed refinancing is in place.
Share Price Trends and Future Outlook
00:09:48
Speaker
so Moving on, I noticed historically, grid share prices traded at a premium to NAV, but it's currently at a wide discount. Do you expect this to change in the foreseeable future?
00:10:02
Speaker
Yes, I see scope for some narrowing in the discount for several reasons. The fundamentals of the best sector remain very supporting and there's clear evidence that things are certainly improving for grid. The company appears to be on a financially stable, sustainable growth path ah with capacity and revenues set to keep rising.
00:10:22
Speaker
yet the share price seems to be pricing in a lot of bad news. So I think it's reasonable to expect some improvement in grid share price as its expansion plans are rolled out, especially if the equity deal currently under negotiation gives investors greater confidence in the company's NAV.
00:10:40
Speaker
Interesting. Thanks, Joanne. I think that gives listeners a very good picture of what Grid is doing and what it has to offer. um You've been listening to Uncovering Trusts, a podcast by Edison Group. If you would like to find out more about Grid and the other investment trusts that we cover, please visit www.eddisongroup.com.