William Heathcoat Amory

Kepler

Updated 06 Mar 2025

Disclaimer

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Greencoat UK Wind. 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.

  • UKW’s NAV total return, which had been previously announced, was -8.5% for the year to 151.2p per share, with the most significant movements from downward power price forecasts, largely seen in the first half, and a revised expectation on long term wind speeds, announced with the Q4 NAV on 29/01/2025. The final results provided more colour on this, which has seen a number of recent years wind speeds incorporated into the data, serving to lower expected long term electricity generation by 2.4%.
  • UKW maintained its portfolio valuation discount rate at higher levels, with the forecast return to investors being a 10% return on NAV (net of all costs).
  • Over 2024, electricity generation was 5,484GWh, 13% below budget owing to low wind and lower availability, with a notable export cable failure at Hornsea 1 in the first half of the year. This represents c. 2% of the UK’s electricity demand, and is enough to power 2m homes, avoiding 2.2m tonnes of CO2.
  • Underlying dividend cover for 2024 was 1.3x on a normalised basis. The board is targeting a dividend of 10.35p per share with respect to 2025, a rise in line with December’s RPI of 3.5%. This is a twelfth consecutive increase by RPI or better, making the UKW one of very few FTSE 250 constituents to increase its dividend each year for the past decade.
  • UKW completed a £725m refinancing of its RCF and near maturing term loans in September 2024 with its existing set of lenders. The Company reduced the size of its RCF to £400m (down from £600m), of which £270m was drawn at 31/12/2024. The next maturing term facility expires in November 2026. The refinancing was well supported by UKW’s existing lender base, demonstrating a strong demand for UKW credit.
  • During the year, UKW divested partial stakes in two wind farms for £41m, and made a £14.25m highly accretive follow on investment in Kype Muir Extension, taking its stake to 65.5%. During 2024, UKW bought back 59.2m shares, and subsequently announced it had completed its initial £100m buyback programme.
  • Over the next five years, UKW expects that excess cash generation will exceed £1bn, and that additional capital will be available through further disposals. The Company has initiated a further share buyback programme of £100m. Remaining excess capital will be applied dynamically and allocated between further, or accelerated, share buy backs and repaying debt to reduce gearing.
  • At the 2024 AGM, the Company held a Continuation Vote, at which 11% of shareholders voted in favour of discontinuation, and therefore the resolution confirmed continuation. Given the shares have traded at a discount greater than 10% on average during 2024, a continuation vote will also be held at the 2025 AGM, which will take place at 4pm on 24/04/2025.
  • As part of a phased succession process Stephen Lilley will be stepping down after the 2025 AGM. Matt Ridley will be joined by Steve Packwood as investment managers of the business. The other key figures in the Investment Manager’s team dedicated to managing the Company remain unchanged.

Kepler View

2024 has been a tough year for the renewable energy infrastructure sector, and Greencoat UK Wind (UKW) has not been immune from sectoral headwinds. Lower power prices and lower inflation have both been negatives, yet bond yields remaining stubbornly high has meant that there has been no offsetting reduction in discount rates. Operationally, lower wind resource has been compounded by an issue with the Hornsea 1 wind farm (the largest asset, now fixed), and as a result electricity generation has been below budget. Despite this, it is heartening that UKW’s normalised dividend cover is 1.3x, which illustrates the resilience built into UKW’s model. Shareholders have continued to receive their dividends, which at the current share price of 113.75p, yield 9.1%.

Over the year, surplus revenues and proceeds from disposals (achieved at NAV), have enabled the bulk of the £100m share buyback programme to be executed (it was formally completed on 14/02/2025 a fortnight before the annual results were published). The board’s continued confidence in the model is illustrated by their commitment to continue the trajectory of the dividend, which sees the target dividend increase in line with the December RPI figure. This has been achieved every year since listing, except for 2024 which saw the increase significantly more than RPI. A further positive for sentiment is the announcement of the new £100m buyback programme which, according to the results announcement, may be upsized depending on the results of disposals. With gearing near the soft limit of 40% of gross asset value, proceeds from disposals will likely be weighed against reducing borrowings. As highlighted in the results call, the board and manager are focused on doing what is right by shareholders, and see realizing assets and buying shares back at the current discount as a highly accretive. The announcement on 10/12/ 2024 is another example of UKW implementing shareholder friendly initiatives. Management fees from 01/01/2025 run on the lower of market capitalization and NAV. This level of fee reduction is, as yet, unmatched by UKW’s peers. The manager is therefore even more strongly aligned with shareholders in the desire to see the share price improve.

With the levered portfolio prospective NAV total return standing at 10% post fees, we think UKW continues to look attractive on a risk adjusted basis against many other investment opportunities. The discount has moved narrower from the widest point seen last week, and UKW’s share price should benefit from any further disposals achieved. Most importantly, the board and the manager continue to demonstrate their commitment and alignment to take the appropriate actions in the long term interest of shareholders. In the meantime, shareholders stand to receive an attractive covered dividend delivered by UKW’s resilient business model.