Pursuant to the Managed Wind-Down announced on 14 December 2023, the Company proposes to conduct an orderly realisation of its assets in a manner that seeks to optimise the value of the Company’s investments whilst progressively returning cash to shareholders. In particular:
· the Board expects that approximately £115 million would be returned to shareholders in the first half of 2024 at, or close to, NAV (subject to shareholder approval and the appropriate use of the Company’s distributable reserves) with further returns of cash to follow as value is realised from the Company’s private markets portfolio in a timely and efficient manner;
· approximately £107.3 million of the Company’s private markets portfolio (valued as at 30 November 2023) is expected to mature between 2024 and 2027 (the “First Tranche”). It is intended that the proceeds from the First Tranche will be returned to shareholders in a timely manner as the investments mature;
· the remaining £81.5 million of the private markets portfolio (valued as at 30 November 2023) is expected to mature between 2029 and 2033 (the “Second Tranche”). As market conditions improve, opportunistic secondary sales of Second Tranche assets would be considered by the Company in order to realise value from these assets in a timely manner;
10/01/24
££££££££££
How much, if any, will have dropped out of the expected return ?
Current share price 82p NAV 107p capital £245.5 million
Disclaimer This is a non-independent marketing communication commissioned by abrdn. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Overview AEI is delivering a sector-leading yield, with low valuations offering strong capital growth potential…
Overview Manager of abrdn Equity Income Trust (AEI), Thomas Moore, aims to deliver three key goals: provide a high income, provide an income that grows over time, and provide capital growth. To achieve these goals, Thomas has considerable flexibility, allowing him to invest across the UK market cap spectrum with an index-agnostic approach. This allows him to find the best opportunities, that often trade at attractive valuations as they are overlooked by other investors (see Portfolio).
The trust is one of the highest yielders in the sector at 7.5%, and the dividends are fully covered by revenue. The manager believes this yield is solidly supported, and its future growth is assured by the diversified portfolio, including the small- and medium-sized companies, and strong underlying revenue growth. Looking forward, Thomas believes a turnaround in macro factors should begin to support a market recovery, with low valuations offering a lot of potential (see Performance).
Gearing is typically a structural element of the trust and has been used to support the high dividend. The current level is approximately in line with the trust’s neutral level to allow the portfolio to capitalise on the low valuations and support outperformance should the market rebound.
The trust’s Discount narrowed sharply in the past 12 months. The trust traded close to NAV for much of the past year which has enabled the board to issue shares and increase the size of the trust.
Analyst’s View Thomas has achieved his goal of delivering a very high yield, making AEI one of the best yielders in the sector and delivering a very competitive yield level from equities. He has also delivered another year of dividend growth, which the manager believes is well supported going forward by the underlying portfolio, including the benefits of a diversified portfolio such as holding small- and mid-caps (see Portfolio). We understand the dividend growth track record, currently 23 years, is likely to be a key focus of the manager and, in our view, the prospects for dividend growth are strong. We think for those seeking high-income generation from their equity holdings, AEI makes for a compelling offering .
In our opinion, the UK market is significantly undervalued, and this could lead to an improvement in capital returns from the trust. We understand this is now a focus for the manager with the income profile well supported. We believe the trust would benefit from a change in market sentiment, with one ‘bucket’ in the portfolio used specifically for identifying undervalued opportunities. We would expect the small and mid-cap bias to be supportive in any recovery as they typically perform better in rising markets. The differentiation these holdings provide could also help with relative performance.
Furthermore, the high level of structural Gearing could support the trust on the upside should sentiment improve. As such, we believe AEI would be a significant beneficiary of a turnaround in market sentiment and would be well-placed to capture a market rally.
Bull Very high covered yield that is delivering growth Differentiated portfolio including a bias to small and mid-caps Trust has recently reduced its charges
Bear Gearing is high which can amplify losses as well as supporting upside potential Value-tilted portfolio could struggle in a growth driven environment Small and mid-cap bias would likely struggle should a recession take hold
631p if u re-invested the dividends elsewhere. U haven’t made any progress since 2018 except u own more shares and if u re-invested the dividends u therefore receive more dividends without investing any more of your hard earned.
Top 10 holdings
9 year dividend history
Can trade on a very wide spread, so caution needed if/when trading.
Continuing on from doing nothing, I’ve changed the chart.
505p is the price if u had re-invested the dividends elsewhere
722p is the equivalent price if u re-invested the dividends back into SCF without the benefit of hindsight.
The price spends as much time falling as rising, so sitting and sticking to your plan is all that matters, belt and braces, just in case u buy at the wrong time.
NESF might not be everyone’s cup of tea but at the end of the day when all’s said and done, is it tidy?
Thanks for reading The Oak Bloke’s Substack.
It’s another FTSE250 company. The OB has covered far too many of these large caps recently; he’s in danger of needing a revised disclaimer and garnering a new reputation if this non-nano cap nonense carries on.
But I promised articles around renewables over several articles, so I picked out what I saw as my faves. This is my final fave.
My favouriting is that I picked out all the high yielders and those with the juiciest discounts and what I see as deep value. Those with a “meh” discount and/or “meh” yield I’ve overlooked and perhaps will come back to…. perhaps you, reader, can point out any that are obvious value and overlooked. I did look over several and I wanted to like JLEN with its fragrant bio-methane holdings. Besides just think of the dad joke OB titles I could use. For example: I’m just JLEN from the block, used to NAV a little – now I NAV a lot…..
But I didn’t think JLEN was very good value, so that article is on hold.
Next Energy Solar
NESF is a large solar investment trust. After years of trading at a premium to NAV, both its NAV and share price have fallen away, albeit its NAV has reverted to 2021 levels – do we see a clue there that “noise” both increased then decreased the assets. Let’s investigate that.
NESF has a large UK footprint, with 10% Italy, and 5% RoW. Its assets are long life, and 933MW capacity and 599GWh generated in 2023 tells us that the energy yield was 7.3% of capacity, while in 2022 the energy yield was 9.1% (599000/(933*365*24)).
The 2022 yield is spot on to the average based on our world in data (you can click on the chart below). It reveals that capacity and generation are fairly consistent between countries. I had wrongly assumed that yield for the UK was lower than say Italy or the Sahara Desert, but the data doesn’t show that. So 85% of solar being in the UK isn’t the disadvantage I’d first imagined it would be. At least not using today’s technology.
The UK yield vs every other country in the world – as you generate more power (horizontal line) you generate more power (vertical line) – there’s not much variance between the equator and the north pole
The answer to this apparent riddle/contradiction is a lower temperature offsets lower irradiance. While more irradiance means more power, more heat shortens the life of equipment and reduces the efficiency of solar too. That factoid has gobsmacked me.
NESF appears to have an impressive portfolio of assets, with low costs of debt (2/3 fixed and 1/3 floating but on very advantageous rates and with 10+ years repayment structures), while revenue has a degree of protection from price fluctuations through hedging, ROC (renewable obligation certificates) and subsidy. As at 31/3/23 NESF had agreed fixed UK pricing (hedged) covering 88% of budgeted generation for the 2023/24 financial year, 44% of budgeted generation for the 2024/25 financial year and 13% for the 2025/26 financial year.
Income in the September 2023 interim covers dividends 1.8X.
The forward yield is a very impressive 11.8%. (based on a 8.43p per share dividend)
Eagle-eyed readers will spot energy storage assets in the above map, and this is a growth area for NESF. These enable NESF to capitalise on existing infrastructure including existing grid connections and inverters, meaning OPEX is optimised, but also that solar generation can be sold at optimal times (i.e. early evening). The idea being that the 92 UK sites could be retrofitted over time with energy storage. Currently 1 site is nearly live, 1 has planning, and 4 applications are in progress.
Interestingly, the power price forecasts include a “solar capture” discount, which reflects the discount on pricing in daylight hours versus during baseload hours. With the introduction of storage such a discount disappears – so a positive reversion for the NAV that not only do you add the asset to the NAV but you also remove the solar capture discount too.
Forecast Prices & Discount Rates
NESF reveals substantial drops due to discount rates increasing to 8% and short term power prices falling also.
When you strip out that “noise” and focus on the real movements roughly inflation protections offsets power price forecast changes, income nearly covers dividends (and in the 25% higher irradiance in 2022 would have fully covered the dividend), while asset capital gains offset project losses and other losses.
The net NAV fall is the 5p/share discount rate change.
Looking forward it appears that Power Price forecasts will eventually return to a positive, as will the discount rate. It wasn’t clear to me that the forecasts are considering the subsidies, the ROCs and hedges that NESF employ. Much of current year is hedged and one and two years ahead also.
4Q24 (1st Jan 2024 to 31st March 2024) meanwhile, shows a further power price forecast decline only slightly offset by positive pricing inflation changes. Going forwards income should rise due to rising capacity which in the 4Q24 update a week or so ago surpassed 1GW.
So future NAV should revert and there’s even scope for some NAV growth, although the large dividend swallows up most of the income so this is predominantly an income stock.
Conclusion
The dividend looks far safer than one might suppose looking at the discount to NAV and recent share price falls. This share actually looks fairly boring and safe, underneath its racy yield and apparent losses through temporary factors which wax and wane. It was a fairly complicated share to understand and compared to SEIT and HEIT the reporting felt inferior. I found much less hidden value compared to the others, also.
Just the obvious value.
That long term the idea that power prices are going to be anything other than upwards based on growing demand and challenges with supply is ignoring the laws of physics. So falling forecasts will revert eventually.
That short term, those power price forecasts might even revert later this year. Today it was announced that El Nino has ended and La Nina has begun. This suggests a colder winter for Europe in 2024. That combined with complacency and our new government knifing Oil & Gas in a populist tax grab, isn’t going to help keep the lights on.
The one area of hidden value is its strategy of adding storage to existing grid connections which is a genius move. Without a connection there is a 5 year average wait for such connections – where those with existing connections have, err, the power. Boom boom.
John D Rockefeller would have liked the UK stock market Story by Simon English
The richest man in history was probably John D Rockefeller, founder of Standard Oil, later broken up into seven smaller companies, one of which is now Exxon Mobil.
At his death, he was worth $700 billion in today’s money.
Elon Musk or Jeff Bezos might top him, but neither plans to die so we may never get a final score.
Both have vainglorious plans for the future – Musk intends to save humanity from itself, Bezos just himself, it seems.
Rockefeller might have been less fun than today’s tycoons. Certainly by the end he was bored, and heard to say: “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”
Rockefeller bought shares that paid dividends and sold the losers to offset capital gains tax. It worked.
That plan, enacted in the UK lately, might even have made Rockefeller break a smile. In the three months to March, London listed shares paid out £12 billion in hard cash to investors, the best for several years, and not bad for a period when the stock market itself was in the doldrums.
Elsewhere in Europe, dividend payments fell.
The flip side of big companies being cautious is that they have had cash they have rightly returned to investors in the form of higher divis and share buy backs
You don’t have to be an investor solely looking for income to find, as Rockefeller did, something awfully reassuring about the clunk of cash from shares into your bank account.
Now the market for flotations seems to be improving, finally, perhaps we can stop worrying about London’s status as a global financial centre.
Even when the stock market was gloomy, most of the rest of the City functioned fine, and the dividend payouts were a symbol of the inherent sturdiness of most of our big firms.
As someone once said about America, there is nothing much wrong with the City that can’t be fixed by what is right with it.
Don’t miss out on the possible resurgence of the domestic market, experts warn.
By Matteo Anelli
Senior reporter, Trustnet.
Momentum is gathering for UK stocks, which surged through record highs last month, and the upcoming elections are drawing even more attention to the domestic market.
Indeed the FTSE 100 peaked at 8,445.8 in May, almost 600 points ahead of its pre-Covid levels, although it remains some way below the likes of the US’ S&P 500 index (11.2% return year-to-date), with the UK large-cap index up 9% in 2024 so far.
Whether this resurgence will be enough for investors to reconsider their preference for global investments and return to the unloved UK market remains to be seen, but experts are becoming more vocal about the opportunities cropping up domestically.
Trustnet has recently asked whether it’s time for a patriotic punt on the UK stock market and many commentators pointed out the favourable entry point due to cheap valuations, increased international merger and acquisition (M&A) activity, improvement in economic data, imminent rate cuts and “voracious” share buybacks.
On top of that, many UK stocks have surged past most of the magnificent seven, with very few people noticing.
Hal Cook, senior investment analyst at Hargreaves Lansdown, said there is a lot to like about the UK stock market.
“With mature industries such as banks, oil and gas and tobacco, the UK has been known as a good place to look for dividend income, but there are plenty of growth opportunities too – from big consumer goods companies selling their products globally to smaller businesses looking to grow into the giants of tomorrow,” he said.
“We think this combination and the discount on offer compared to other regions make the UK an attractive place to invest right now.”
The main way – and the cheapest – to invest in the UK are exchange-traded funds (ETFs), according to Cook, whose preference was for two iShares and one Vanguard solutions.
For investors who want to get exposure to the largest UK companies, he recommended the iShares Core FTSE 100 ETF, which tracks the performance of the FTSE 100 index.
Performance of fund against sector and index over 1yr Source: FE Analytics
“It does this by investing in every company and in proportion with each company’s index weight. This is known as full replication, which can help the ETF track the index closely,” he said.
The £2.2bn fund is passively managed by Blackrock, has achieved an FE fundinfo passive fund Crown-rating of five, and only charges 0.07%.
ETFs also offer access to income-paying stocks and Cook’s pick was iShares UK Dividend ETF, a low-cost option for tracking the performance of the FTSE Dividend UK+ index with a price tag of just 0.40%.
Performance of fund against sector and index over 1yr Source: FE Analytics
This £848m vehicle offers exposure to 50 of the highest dividend-paying stocks listed in the UK, while still making sure it’s diversified across multiple sectors. The trailing 12-month yield is currently 5.45%.
Finally, medium-sized companies enthusiasts should consider the Vanguard FTSE 250 ETF, which aims to track the performance of medium-sized companies in the UK as measured by the FTSE 250 index.
Performance of fund against sector and index over 1yr Source: FE Analytics
FE Investments analysts highlighted this fund for its simple method of replicating the performance of the index by direct ownership of all the underlying securities as well as its usage of stock lending, a practice by which a select third party borrows a limited amount of the passive fund’s holdings in exchange for a fee.
This supplements fund returns and compensates for the trading costs involved with direct ownership of the securities.
Among the investment management houses, Hawksmoor has been betting big on a UK recovery. Chief investment officer Ben Conway said that a FTSE 250 tracker would be a good option to capture a broad spectrum of opportunities in the mid-cap space, but fans of active management can also consider Aberforth Smaller Companies and Odyssean.
Not everything will be smooth sailing for the UK, however, and work remains to be done in a number of areas. The finance industry has been advocating for a number of changes to get Britain back on track.
A Dividend Hero Trust where to GRS, u just need to re-invest the dividends, whilst in the Accumulation stage and then switch into a higher yielder before u start De-accumulation.
A belt and braces strategy would be to pair trade the Trust with a higher yielder and hold thru thick and thin. When markets are weak your dividends will be buying u more Trusts at a higher yield. A strategy to GRS in great markets but even a better strategy in falling markets.
