GCP Infrastructure – Consolidate and capitalise
- 23 January 2025
- QuotedData
Andrew Courtney
Consolidate and capitalise
For most of 2024, financial conditions had finally started to turn favourably for infrastructure investors. Inflation had dropped sharply from the previous year, allowing the Bank of England to begin its easing cycle, while the new government’s ambitious plans for infrastructure development provided a renewed sense of optimism across the sector. These green shoots were evidenced by GCP’s annual results, which showed a total shareholder return of 28.4%, leading to a significant narrowing of its stubborn discount. Unfortunately, a negative reaction to the UK budget, and concerns around the inflationary impact of US tariffs, saw gilts retrace their highs, erasing some of these gains.
Despite this, we remain increasingly optimistic about GCP’s prospects as it continues to execute on its capital recycling programme. Coupled with improving market conditions, an impressive policy backdrop, and its long track record of capitalising on changing market dynamics, we believe there is a considerable opportunity for investors at current prices.
Public-sector-backed, long-term cashflows
GCP aims to provide shareholders with sustained, long-term distributions and to preserve capital by generating exposure primarily to UK infrastructure debt or similar assets with predictable long-term cashflows.
| 12 months ended | Share price TR(%) | NAV total return (%) | Earnings1per share (pence) | Adjusted2 EPS (pence) | Dividend per share (pence) |
|---|---|---|---|---|---|
| 30/09/2020 | (2.0) | (0.22) | (0.08) | 7.65 | 7.6 |
| 30/09//2021 | (7.9) | 7.2 | 7.08 | 7.90 | 7.0 |
| 30/09/2022 | 3.8 | 15.7 | 15.88 | 8.30 | 7.0 |
| 30/09/2023 | (25.2) | 3.6 | 3.50 | 8.58 | 7.0 |
| 30/09/2024 | 28.2 | 4.6 | 2.25 | 7.09 | 7.0 |
Source: Morningstar. Note 1) EPS figures taken from 30 September each year. Note 2) Adjusted earnings per share removes the impact of unrealised movements in fair value through profit and loss.
Company profile
Regular, sustainable, long-term income
GCP Infrastructure Investments Limited (GCP) is a Jersey-incorporated, closed-ended investment company whose shares are traded on the main market of the London Stock Exchange. GCP aims to generate a regular, sustainable, long-term income while preserving investors’ capital. The company’s income is derived from loaning money predominantly at fixed rates to entities which derive their revenue – or a substantial portion of it – from UK public-sector-backed cashflows. Wherever it can, it tries to secure an element of inflation protection.
In practice, GCP is diversified across a range of different infrastructure sectors, although its focus has shifted more towards renewable energy infrastructure over the last few years. It has exposure to renewable energy projects (where revenue is part subsidy and part linked to sales of power), PFI/PPP-type assets (whose revenue is predominantly based on the availability of the asset), and specialist supported social housing (where local authorities are renting specially-adapted residential accommodation for tenants with special needs).
Annual results
GCP is trading dividend yield of 9.8%
On 12 December 2024, GCP published its annual results for the period to 30 September 2024. The company’s NAV total return was 2.2%, while the shareholder total return was 28.4% with the discount narrowing significantly to 25%, although this has since widened to 32.6% at the time of publication. Whilst GCP does not compare its returns with those of a benchmark index, the sterling corporate bond index is a useful comparison, and this returned 10.7% over the same period.
Dividends continued to run at an annualised pace of 7.0p per share, so that GCP is trading on a dividend yield of 9.8%. On the company’s adjusted earnings basis, calculated on interest accruals, dividend cover was 1.01 times (down from 1.23x at the end of the 30 September 2023). On a cash cover basis, this ratio is much higher. Profit was £19.5m (down from £30.9m). As we have covered in our previous research, the company’s financial performance continues to be driven by electricity prices and inflation, both of which have normalised from elevated levels, leading to a negative impact on profitability.
The company’s NAV total return was 2.2%, while the shareholder total return was 28.4%
Despite this, the company was still able to deliver a positive NAV total return for the year, while the 28% total shareholder return reflected the steadily improving market conditions and the ongoing implementation of the company’s capital recycling programme, which has remained the key focus for the manager over the past 12 months.
It should be noted that the shareholder return did benefit from timing factors, and some of these gains have been given back as economic uncertainty remains elevated. However, as we discuss in the market backdrop section, we remain increasingly positive on the outlook for the sector and the ability for GCP to capitalise on the growing investment opportunity, considering the significant structural changes occurring across the infrastructure sector.
Attribution and performance
Figure 1: Positive factors affecting FY2024 performance
| Impact (£m) | Impact (pence) | |
|---|---|---|
| Tax computations | 1.1 | 0.13 |
| Principal indexation | 0.8 | 0.09 |
| Other inflationary movements | 3.2 | 0.37 |
| Total | 5.1 | 0.59 |
Source: GCP Infrastructure Investments
As Figure 1 shows, positive contributions to NAV for the 2024 financial year were limited to tax computations and inflationary mechanics across the portfolio thanks to the company’s inflation linkages and protections. The otherwise-limited portfolio activity reflects the adviser’s focus on consolidation and its capital recycling policy as the company seeks to reposition itself for further growth.
Figure 2: Negative factors affecting FY2024 performance
| Impact (£m) | Impact (pence) | |
|---|---|---|
| Power price movements | (13.7) | (1.58) |
| Increase in discount rates | (10.6) | (1.22) |
| Energy yield assessment | (7.8) | (0.90) |
| Project long-term budget | (5.6) | (0.65) |
| Inflation forecast | (3.4) | (0.39) |
| Onshore wind asset outage | (2.0) | (0.23) |
| Actual performance | (3.0) | (0.35) |
| Other downward movements | (3.2) | (0.37) |
| Total | (49.3) | (5.69) |
Source: GCP Infrastructure Investments
Faling electricity prices had the largest impact on the downside
Falling electricity prices had the largest negative impact, although the vast majority of these occurred in the first half of the company’s financial year. As we have discussed in our previous research, it is important to note that the UK energy market is emerging from several years of unusually high volatility and prices remain well above historical averages. Over the last 24 months, this has provided strong cash flow generation for the GCP portfolio. More recently, prices in the UK have shown signs of stabilisation.
Notably, one of the main goals for the company’s current portfolio development is to reduce exposure to electricity price volatility, as evidenced by the recent sale of GCP’s interest in Blackcraig Wind Farm (discussed on page 7). In addition, where possible, the company continues to fix prices under power purchase agreements and hedge electricity prices.
Increases to discount rates have also weighed on the NAV, as have inflation adjustments, with inflation falling steadily over the course of 2024. Whilst inflation has not impacted operational performance, lower inflation projections have reduced the cash expected to be generated by the company’s loans and therefore the associated valuation has been reduced.
Market backdrop
Higher interest rates have weighed heavily on the infrastructure sector
We have written frequently about the challenges faced by the infrastructure sector in recent years, driven mostly by the rise in interest rates that has greatly increased the relative attractiveness of more traditional income sectors, particularly low-risk corporate and government debt.
As evidenced in the company’s 2024 performance, valuations have fallen due to rising discount rates, while the increase in financing costs has weighed on the sectors’ appeal, especially for those companies relying on leverage to help drive capital deployment programmes. Despite this, we believe the extent and duration of the current sell-off goes well past the mechanical impact of these events, highlighted by valuations which have fallen below levels seen during the worst of the GFC. This is especially true for GCP, which has maintained conservative leverage and continues to generate strong earnings thanks to its focus on diverse, long-term, public-sector-backed investments; inflation linkages; and regulated and contracted cashflows. For comparison, back in 2010, when yields were at a similar level to where they are today, GCP traded on a premium of almost 10% despite having a less diversified portfolio, and greater exposure to construction stage projects. As of publishing, its discount was 32.6%, a change of over 40 percentage points, which is clearly not a fair reflection of the quality of the company’s underlying assets.
The renewable infrastructure sector which now makes up over 60% of GCP’s portfolio.
We believe the entire sector has been tarred by the poor performance of a relatively small number of operators whose business models have proven to be untenable in the current market environment. There also appears to be a broader lack of understanding around these assets and the quality and reliability of the investments that have enabled dividend yields to head towards 10%. Positively, given the wealth of structural growth opportunities which exist across the sector, these depressed valuations do provide a compelling opportunity for companies such as GCP with the scale and flexibility to consolidate and capitalise.
Manager Philip Kent points to the company’s long-term track record of performance across various market cycles as a reason for optimism going forward. A focus on diversification across the infrastructure spectrum has allowed it to adapt to developments in any one sector (such as decreasing yields and more competition) and move into other areas if a sector no longer represents attractive risk-adjusted returns. This has been evidenced in recent years, with the company working through the divestment of its maturing supported living assets while shifting exposure into the renewable infrastructure sector, which now makes up over 60% of GCP’s portfolio. With multiple factors now driving infrastructure investment, including infrastructure deployment to address population change; decarbonisation; and energy security, there exists a wealth of opportunities to shift into higher-yielding and more-attractive sectors of the market.
Improving outlook
In our previous research we highlighted how the adviser believes that there is a significant disconnect between the government’s stated aims for infrastructure investment and what is actually being built. This has only become more compelling following the policy initiatives announced by the new Labour government.
These included a range of measures to speed up infrastructure development including changes to the National Planning Policy Framework and the formation of the National Infrastructure and Service Transformation Authority to better support the delivery of significant capital projects. In addition to housing and energy security, the renewable energy sector was a key area of focus as the government attempts to deliver its ambitious goal of fully decarbonising the electricity system by 2030.
We expect the steady normalisation of interest rates to provide a catalyst.
GCP appears to be increasingly well positioned to capitalise on these developments thanks to its flexible, debt-focused funding approach. The company’s track record of being an early mover appears especially well matched with regard to new subsidy regimes for emerging technologies. These include net zero (green) hydrogen, carbon capture, and the expansion of existing market support measures (such as the CfD scheme), which offer an attractive opportunity for GCP to play a key role in the scaling-up and deployment of new infrastructure.
Interest rates
The steady normalisation of interest rates ought to be providing another catalyst. With inflation falling back to target, the Bank of England (BOE) has now begun to ease monetary policy, announcing two 25-basis-point rate cuts in 2024, dropping the bank rate to 4.75%. These announcements helped drive a solid re-rating for many of the better-performing infrastructure companies, including GCP, over the first half of 2024.
Unfortunately, it has not all been one-way traffic, with concerns around the inflationary impact of the budget and the potential knock-on effects from US policy uncertainty (particularly around tariffs) leading to a repricing in the number of rate cuts expected for 2025 and rising government bond yields. As shown in Figure 3, we are now expecting between two and three cuts over the next 12 months, for an implied rate around 4%. Although this is still a significant shift down from the peak of 5.25%, only a few months ago markets were anticipating up to five rate cuts over this period. As we discuss in the discount section on page 15, this has led to a repricing of some rate-sensitive sectors of the market after a period of optimism earlier in the year.
Despite this, the BoE remains committed to easing monetary policy and as interest rates fall, we expect capital to flow back towards alternative investments, especially given the attractive yields on offer, highlighted by GCP’s current yield of 9.8%.
Figure 3: Implied UK overnight rate & number of cuts
Source: Bloomberg
Cost disclosures
The entire investment trust sector should also benefit from long-overdue cost disclosure reforms. On 22 November 2024, a Statutory Instrument came into law to remove the requirement for investment companies to publish ongoing charges, a figure widely accepted to be an inaccurate representation of the actual cost of investing in the sector.
On 22 November 2024, a Statutory Instrument came into law to remove the requirement for investment companies to publish ongoing charges
Although this is a no doubt a positive development, since the announcement there has continued to be confusion, with some investment platforms still requiring ongoing charges to be disclosed. The reforms have not been helped by a recently published consultation paper by the FCA on its proposed consumer composite investments regulation. Some have interpreted this as an intention to reinstate a single aggregated cost figure for trusts, without acknowledging that costs are already reflected in share prices. Unfortunately, the consultation will not close until March 2025, and implementation of any new rules might not be until the end of the year, suggesting that the row will drag on for a while yet. You can read our ongoing discussions around the cost disclosure issues here.
Capital recycling
In December 2023, GCP announced a plan to release £150m (roughly 15% of the portfolio) to facilitate a rebalance of sector exposures, apply funds towards a material reduction in the RCF, and return at least £50m in capital to shareholders. It was initially hoped that this would be completed by the end of 2024; however, consistent delays throughout the year have meant the target completion date has been shifted to H1 2025. This delay is tempered by the expectation that realisations will now comfortably exceed the initial target.
To date, the company’s disposals total £38.2m, the bulk of which was achieved via the sale of GCP’s interest in loan notes secured against Blackcraig Wind Farm. The disposal occurred at a 6.4% premium to the valuation of the project as at 31 March 2024, generating net cash proceeds of c.£31m while reducing GCP’s exposure to power prices and equity-like investments (which now sit at just 6% of the portfolio). Importantly, the sale also provided further validation of the company’s underlying NAV. A portfolio of rooftop solar assets has also been realised, generating proceeds of £6.8m. Subject to contract, further proceeds of c.£20m are expected from the disposal of a portfolio of onshore wind farms.
To date, the company’s disposal’s total £38.2m
With the proceeds of Blackcraig now available to it, GCP has been buying back shares steadily since 12 December 2024.
Debt reduction
Although the initial stages of this capital programme have taken longer than originally hoped, the company has made material progress in its stated aims of reducing the outstanding RCF, which was identified as a priority given the high-interest-rate environment. In March 2024, the RCF was refinanced from £190m to £150m with the drawn balance of this facility reduced significantly from £104m at 30 September 2023 to £57m. As further disposals are completed, the company expects this balance to be reduced to zero.
Over the 2024 financial year, the company also completed the repurchase of 3.4m shares under its existing buyback facility. The repurchase of shares continues to offer attractive returns, given the current discount to NAV, while helping to address any imbalance in supply and demand that may otherwise create volatility in the rating of the company’s shares. This remains a delicate balance, however, with the adviser remaining conscious that further buybacks may do little to move the discount and would reduce the size of the trust – decreasing liquidity and perhaps deterring some of its target investors.
Portfolio
As of 30 September 2024, there were 50 investments in GCP’s portfolio (including the rooftop solar portfolio discussed above, with the sale occurring after the financial year end). The average annualised portfolio yield over the financial year was 7.8%, and the portfolio had a weighted average life of 11 years.
Figure 4: Split of the portfolio at 30 September 2024
Source: GCP Infrastructure Investments
No new investments were made over the financial year, with the adviser focusing instead on its capital recycling programme.
Figure 5: Sector allocation at 30 September 2024
Figure 6: Security allocation at 30 September 2024
Source: GCP Infrastructure Investments
Source: GCP Infrastructure Investments
As noted, the adviser views renewable energy infrastructure as a key area of focus and going forward. The rebalancing of the portfolio through the capital reallocation policy is targeting a reduction in social housing and equity-like exposures, which now sit at just 6%.
Figure 7: GCP sources of income as at 30 September 2024
Source: GCP Infrastructure Investments. Note 1) does not include the sale of the rooftop solar portfolio which occurred post period end.
Top 10 investments
Figure 8: GCP’s 10 largest investments as at 30 September 2024
| % of total assets 30/07/24 | Cashflow type | Project type | |
|---|---|---|---|
| Cardale PFI | 12.7 | Unitary charge | PFI/PPP |
| Gravis Solar 1 | 9.7 | ROC/FiT | Commercial solar |
| GCP Programme Funding S14 | 5.4 | ROC/RHI/Merchant | Biomass |
| GCP Programme Funding S3 | 4.4 | ROC/PPA | Anaerobic Digestion |
| GCP Programme Funding S10 | 4.5 | Lease | Supported Living |
| GCP Bridge Holdings | 5.0 | ROC/PPA | PPE – Energy-from-waste / Energy efficiency |
| Gravis Asset Holdings H | 4.4 | ROC/RHI | Onshore wind |
| GCP Biomass 2 | 4.1 | ROC/PPA | Biomass |
| GCP Social Housing 1 B | 3.8 | Lease | Supported living |
| GCP Green Energy 1 | 3.7 | ROC/PPA | Commercial solar/onshore wind |
Source: GCP Infrastructure Investment
Figure 9: Top 10 revenue counterparties
| Firm | % of total portfolio |
|---|---|
| Ecotricity Limited | 9.2 |
| Viridian Energy Supply | 7.8 |
| Office of Gas and Electricity Markets | 6.4 |
| Npower Limited | 6.3 |
| Statkraft Markets GmbH | 5.9 |
| Bespoke Supportive Tenancies Limited | 4.6 |
| Smartestenergy Limited | 4.5 |
| Total Gas & Energy Limited | 4.4 |
| Good Energy Limited | 4.4 |
| Gloucestershire County Council | 4.1 |
Source: GCP Infrastructure Investments
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