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7. Bull, Bear & Beyond – Premier Miton Global Renewables Trust: executive interview
7 Plays1 year ago
In this interview, James Smith, fund manager of Premier Miton Global Renewables Trust (PMGR), discusses the trust’s portfolio as well as the broader renewable energy sector. PMGR’s investment objectives include achieving a high income and realising long-term growth in capital value. The company invests principally in equity and equity-related securities of companies operating primarily in the renewable energy sector, as well as other similar infrastructure investments.
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About ‘Bull, Bear & Beyond’
'Bull, Bear & Beyond': features candid conversations with senior executives and from our own team of experts from across industries, exploring strategy, innovation, and the opportunities shaping their markets.
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Transcript
Introduction to the Fund and Renewables Sector
00:00:07
Speaker
Hello, I'm Andrew Keane from Edison, and it's my pleasure today to welcome James Smith, manager of the Premier Might and Global Renewables Trust, to talk about the fund he manages and the sector more generally.
00:00:18
Speaker
James, welcome. Hi.
Optimism in US and European Renewable Assets
00:00:21
Speaker
James, let's start with the renewables market in general. Which sub-sectors are you more bullish about, more bearish about ah within the within the broader market?
00:00:31
Speaker
Well, primarily, I invest in operational ah renewable energy assets, so wind farms, solar farms and companies that build and operate them. ah Geographically, there's a lot of attractive areas at the moment. I would pick out the US, very strong electricity growth coming from the technology sector.
00:00:49
Speaker
So building new data centres. And particularly if the data centre is using artificial intelligence, they have a huge demand for power. And those companies prefer to contract with renewable energy, both for their own carbon footprint.
00:01:03
Speaker
But as you know, renewable energy being a largely fixed cost generator is able to offer fixed price long term contracts. So that's attractive. So we're seeing good growth in the States. um I think Europe is also quite attractive at the moment.
00:01:16
Speaker
ah in the sense that we've we've come through this very turbulent period ah post the Russian invasion of Ukraine in 2022. And of course, that pushed energy prices, particularly electricity prices, to very high levels.
00:01:29
Speaker
And they've come back down. um but they are ah they've kind of settled at a higher level which is attractive ah for renewable energy generators but we're seeing less volatility in the European market and I'm hoping that will that will lead to you know positive investing environment ah for the sector so I think both Europe and the States are both very attractive at the moment.
Attractive Companies in Renewables
00:01:51
Speaker
And how does that translate into your particular fund I mean what kind of portfolio changes have you made in the past year you know are there any any particular changes you want to highlight? In terms of individual areas, here we have been building up some European positions and also the States.
00:02:07
Speaker
mean, if I can mention individual companies, for instance, AAS Corporation in the States, they are seeing very strong demand ah for large scale renewable energy assets coming from the technology sector.
00:02:19
Speaker
ah In Europe, we're seeing some good numbers coming out of some of the larger renewable energy companies. We've seen a good positive offshore wind auction ah in in the UK.
00:02:32
Speaker
So I think any company with exposure to offshore wind is is is attractive at the moment. So ah SSE, for instance, RWE in Germany. um So, you know, we've been focusing attention on those.
00:02:44
Speaker
um Other areas that i think perhaps often overlooked in a way that we can maybe add a little value are subsectors such as offshore wind turbine installation vessels, for instance. So now one of the top ten holdings in the fund is a company called Cadella, which is the market leader.
00:03:01
Speaker
And the interesting thing about offshore wind, of course, is that the the turbines have increased so much in size. So there is quite a shortage of the very large vessels that are capable of installing the new generation of offshore wind turbines.
00:03:14
Speaker
So, you know, that's a change that we've made to the to the portfolio and so far performing quite well for us.
Investment Strategies in Renewables
00:03:19
Speaker
So in addition to ah geography and and and technology, there's also the issue of development stage, you know whether or not you're you're investing firms taking on development risk or whether they're more operating in yield codes, so to speak. ah how How do you view that in the current environment?
00:03:37
Speaker
Yeah, so so for the benefit of people who aren't necessarily familiar ah with the terminology here, there are two very broad categories of renewable energy company. So the first one you mentioned, yield codes, which stands for yield companies or investment companies.
00:03:52
Speaker
And of course, we have a few of those in the UK, like Greencoat UK Wind, for instance. And their business model is to buy and then operate ah renewable energy assets.
00:04:03
Speaker
And they pay out a large share of their cash flow to investors in the form of a dividend. Now, the other type of renewable energy company is a company that actually develops renewable energy assets. And what we mean by develop is go from first concepts, you know, let's think about building a solar farm over here.
00:04:22
Speaker
and take that through the planning process, the environmental approval process, grid connection, etc, etc, through to an operational asset. And they may well then own the asset or they may sell the asset to an investment company, for instance, or maybe a a combination of both, sell a part of the the asset.
00:04:41
Speaker
Now, we own both types of those within the portfolio. um The advantage of the yield codes is that they give you a strong yield, which we can then pay to our investors. But the if you think about the returns over the entire lifecycle of a renewable energy asset, the development stage is higher risk and therefore typically attracts a higher return.
00:05:03
Speaker
So we have actually been taking on some more developer type companies within the portfolio, trying to boost those risks. So returns, maybe at the expense of slightly higher risk, but we think that returns available and more than justify doing that.
00:05:18
Speaker
So that's been something that we've been looking at quite closely.
Impact of Interest Rates on Renewables
00:05:21
Speaker
And how does the interest rate environment come into into that decision? Because Yurkos were very attractive in a low interest rate environment.
00:05:29
Speaker
We've seen interest rates come up now, potentially lowering, but we're not really necessarily seeing a full reversion in that curve. does that How does that play into ah not only your thinking, but perhaps investors thinking into, you know do are they going to become relatively more attractive as as interest rates fall? Yeah.
00:05:49
Speaker
Well, as you know, the sector has been quite a poor performer over the past few years in that increasing interest rate environment. Now, I hate the term, but often you might hear some investors say bond proxies. so And they're referring, of course, to things like utilities or property.
00:06:04
Speaker
And of course, these days, renewable energy. Because the the cash flows from a renewable energy asset are quite predictable, ah lower than average risk. ah Investors often view them as having bond-like characteristics. So it's no surprise that when interest rates have been increasing, the sector hasn't done particularly well.
00:06:23
Speaker
um so if we are going into an environment where um interest is coming down then all else equal that should be positive ah for the sector so in terms of the uk companies for instance we've seen them go from a ah premium to net asset value to a ah discount to nasa value um Now, it's probably worth saying that net asset values themselves, and these are what the companies, those yield companies say the portfolio is worth, haven't actually changed a great deal, despite the interest rates environment going up.
00:06:59
Speaker
And what they're doing is that they are, as as yeah I'm sure you're aware, they are coming up with a discounted cash flow calculation to try and value their assets. So as interest rates go up, you discount those future cash flows at a higher rate and you have a lower current valuation.
00:07:16
Speaker
And the market understands that. What the market hasn't understood, though, is that those cash flows themselves will be higher because interest rates have only been high because inflation's been high. And a lot of the revenues within the sector are inflation linked.
00:07:29
Speaker
So thet those two effects have kind of, for the most part, offset each other. Although the market has really been over focused on interest rates in in my view. um So I guess to summarize, the interest rate environment isn't nearly as important as people think it is on a fundamental basis.
00:07:47
Speaker
But from a trading markets basis, yeah, the direction of interest rates is actually quite important. And I'm hoping now we're heading into a far more benign environment.
Challenges in Battery Energy Storage
00:07:56
Speaker
You've talked about offshore wind and and some of the other sectors.
00:08:00
Speaker
Battery energy storage, and it's an important part of the infrastructure solutions for an energy transition, but it's had a difficult year. i mean what What are your views on that as ah as a sector?
00:08:12
Speaker
Battery energy storage, yeah it's worth understanding what it's for. It's there to manage short-term volatility on the electricity grid. um Now in the UK that's that kind of managed through largely competitive markets and it's been rather cyclical.
00:08:30
Speaker
So for a few years we had we didn't have quite enough battery energy capacity to manage those flows so it was very well remunerated and now we probably have slightly more than we need so the returns have have gone down.
00:08:41
Speaker
And if you look at those battery energy storage companies in the UK the share prices were very high and now they're quite low. But like with any cyclical industry, you reach low point, investment stops going into the industry and then prices recover.
00:08:58
Speaker
So where we are on that stage, I'm not entirely sure, but I don't think things can get much worse than they have been over the past 12 months, for instance. um It's worth noting that in other areas of the world um batteries are a much more regulated asset.
00:09:16
Speaker
So typically what would happen is the local grid company, the local distribution company ah will put out a tender and and you will build a battery asset, a battery storage asset which will then have a contract For pretty much all its revenues or a large part of its revenues.
00:09:31
Speaker
So in the States, for instance, the battery energy, a battery energy environment is far more, i would say, lower risk than it is in the UK. So it does depend on where in the world you're talking about.
Capital Raising Challenges and Market Dynamics
00:09:43
Speaker
you talked We talked a little bit before about the discount to NAV that's that that's come out with with rising interest rates.
00:09:50
Speaker
and With the funding model for a lot of firms in this sector, that makes it very difficult for them to to raise capital at a discount NAV. So you're seeing firms looking at things like recycling capital or potentially taking on some debt. i mean do Do you think that the discount to NAV is actually a hindrance to getting capital into the sector for growth?
00:10:11
Speaker
ah Well, it obviously is because these companies can't really issue new shares at a discount to their published net asset value. um i mean, my my own view for what it's worth is that these companies, although they are publishing a net asset value,
00:10:28
Speaker
um You know, what is that net asset value? It's just a discounted cash flow valuation. In the same way that you as an analyst for years have been doing discounted cash flow valuations of operating companies and saying it might i have a price target of $5 or whatever it is.
00:10:44
Speaker
And the market says, well, that's very interesting, but we're going to use a PE or another form of valuation metric, and we're going to value it at $3.50. And I think that's what's happening within the sector.
00:10:56
Speaker
um So I guess that then leads you on to the question is, is the investment company model maybe the right one for for those companies going forward? And, i you know, I don't have an answer to this.
00:11:09
Speaker
But and I think unless things pick up, unless we're seeing more capital coming into the sector and seeing those premiums restored, I mean, it doesn't have to be a big premium, but anything above NEV, then they won't be able to raise and new capital and they will have to look at other ways to ah fund their development.
00:11:30
Speaker
And what we've seen in the investment company sector is that all the time they are becoming more and more like a normal renewable energy company. So they're going up the value chain, they're doing more development work.
00:11:43
Speaker
So the first thing they used to do, they always used to buy operational assets. And then in order to try and generate a higher return, they started buying assets at the ready to build stage. And now we're seeing a number of them actually owning or having ah agreements with renewable energy developers to to go even further upstream.
00:12:02
Speaker
So you begin to think, well, you know, the the line between a a normal renewable energy company and an investment company is becoming increasingly blurred all the time. And for me, I don't make the distinction. with I'm happy to own either. What I'm doing is I'm looking at the fundamental value of of what we actually own and ignoring how the market labels it or how they happen to account. Do they account like an investment company or like a a standard corporation?
Future of Renewables and Investor Interest
00:12:30
Speaker
i'm trying to look through that because i think that just is causing confusion actually just on on general uh it's a very general question on fashion you know renewables have been that perhaps it's slightly out of fashion you know it's a thematic sector despite the high growth but what do you think of the general catalyst that bring broader investors back into the sector is it changing power prices for the growth changing interest rates is it a combination of those factors I think it's definitely a combination you know interest rates coming back down will undoubtedly be a huge help
00:13:06
Speaker
ah In Europe, we're still seeing this post-Ukraine environment where politicians, they used to be very concerned about the the environment, the the the you know carbon emissions.
00:13:18
Speaker
Now they're more concerned about security of supply. So having renewable energy generated ah within Europe rather than importing large amounts of gas from Russia.
00:13:29
Speaker
um so And of course, you know climate change is is still with us and is becoming increasingly important. And then we have things like electricity growth. And as you know, for many years, demand for electricity has been falling as we've used electricity more efficiently.
00:13:43
Speaker
and Now it's going to start rising because of data centers, electrification of transport, electrification of space heating, whatever it is. Now, all those trends are fundamental, important, permanent structural shifts, and they're not going anywhere.
00:14:01
Speaker
And as long as they are there, renewable energy will be in demand and it will continue to grow. So we just kind of need some of these shorter term factors like interest rates and to kind of be onto the back burner.
00:14:13
Speaker
And then the market can concentrate on the real fundamental value of of what we actually have here. And that is, you know, the only energy sector that really is ah growing and showing fundamental long term appreciation of value.
00:14:27
Speaker
James, thanks for joining us today and and sharing your views. so My pleasure. For any further information, please look to the Edison website for further details. Thank you.