SDCL Energy Efficiency Income Trust

David Stevenson

SDCL – worth a closer look for income investors
I’ve long thought the market undervalues SDCL Energy Efficiency Income Trust (SEIT). Over the last few years, it has done pretty much everything to prove that its discount – which at one point hit 42% – was wide of the mark. Its sold assets at or above their net asset value. It runs an extensive share buyback programme. It has a covered dividend from relatively dull assets. Its net yield, even now, is a compelling 9.5%. Its managers have bought shares, and so have the directors. It even turned in decent trading numbers back in March: a quick summary below.

The portfolio aggregate EBITDA outperformed the budget for the calendar year 2023
The Investment Manager has selected a preferred bidder for one of the Company’s larger investments and aims to select a partner for another in the coming months
The Company is on track to deliver fully cash-covered aggregate dividends of 6.24p per share for the financial year to 31 March 2024
SEEIT made organic investments totalling £52 million between 1 October 2023 and 18 March 2024, all of which into existing assets under development or construction – predominantly in Red Rochester and Onyx – where the Company anticipates strong double-digit internal rate of returns
I think the fund’s research team at Numis summed it up nicely (back in March) when they observed that “SEIT’s update contains positive comments on EBITDA delivery from the portfolio, a cash covered dividend, and progress on its disposal plans with an update expected by the end of June along with additional clarity on capital allocation priorities. Potential proceeds will be used to repay the £155m drawn balance on its RCF.”

It was also recently announced that US private equity firm General Atlantic has built a 12% stake in SDCL Energy Efficiency Income Trust (SEIT), making it the second-largest shareholder after wealth manager Investec, according to Citywire. Here’s a bit more colour from that Citywire report :

“After shares in the £950m renewable infrastructure fund derated last year, New York-based General Atlantic started to build a $99m (£79.3m) position in December. It last bought shares in March. They currently trade on a 28% discount, reducing its market value to £679m.

Headed by executive chair Bill Ford, General Atlantic portrays itself as a patient, long-term investor in unquoted growth companies on behalf of wealthy families.”

So, to repeat, this is a quality fund with a well-covered dividend, proving its net asset value, with a big strategic investor on board and still yielding 9.5% on a 25% discount. As soon as interest rates start to decline, I think investors will begin to realise that even at a 25% discount, this is dirt cheap. I think there’s a decent chance that by this time next year, the share price could be back above 80p, and in the meantime, investors will also pick up the healthy dividend cheque. For income-seeking investors, this is well worth a closer look.