SDCL Energy Efficiency Income (SEIT)
09/12/2024
Results analysis from Kepler Trust
Intelligence
SDCL Energy
Efficiency Income (SEIT) has reported its interim results to
30/09/2024, with the NAV stable at 90.6p (31/03/2024: 90.5p) and
aggregate dividends of 3.16p compared to 3.12p for the same period
last year. SEIT made a profit before tax of £35 million (2023
equivalent period: Loss of £89m). At the current share price, SEIT
yields c. 11%. First half dividends were covered 1.1x by cash and
the board reaffirmed its dividend guidance for the year ending
31/03/2025 of 6.32p (2024: 6.24p). SEIT's portfolio valuation was
£1,103m compared to £1,117m at 31/03/2023, with the main difference
being the sale of UU Solar for £90m in May 2024.
SEIT's gearing
was 35% LTV, with 11% at a fund level through the trust's revolving
credit facility (RCF) and 24% at a project level. The same figures
calculated as a percentage of NAV were 54%, split 17% at the trust
level and 37% at a project level. The average interest rate was
5.6% and the average remaining life 4.1 years. Over 80% of debt at
a project level is amortising, meaning it will naturally run off
over time. SEIT's discount at the half year end was c. 30% and is
currently c. 36%. The Morningstar Renewable Energy Infrastructure
peer group average was c. 20% and is currently c. 28%. The board
and manager set out a plan to address the discount in the final
results to 31/03/2024, the
main points focusing on disposals, NAV return, capital allocation
and reducing short term borrowings.
Kepler
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In the weeks before SDCL
Energy Efficiency Income's (SEIT) results announcement, the
Morningstar Renewable Energy Infrastructure peer group in which it
sits experienced significant discount widening, seemingly a result
of the US election and investor worries about the different
approach the new administration is expected to take to renewable
energy. Share prices of other renewable energy companies were
similarly hit. While it's quite likely in our view that this is a
sector-wide over-reaction, SEIT has some specific differences in
its business model compared to the peer group.
First, the vast majority of
SEIT's revenues do not rely on any form of subsidy or incentive,
and its projects are primarily rooted in their commercial
attractions. Second, SEIT has very limited merchant exposure, with
most of its long-term revenues contracted, and low direct exposure
to power prices. SEIT is really an equity investor in platforms
that provide corporate customers with efficiency solutions, so it
participates not only in the contracted revenues that come from
these solutions, but in the growth of the platforms themselves.
Third, SEIT's project-level debt is mostly amortising and so is
repaid over a period of time, with many of its assets and
investments extending well beyond the life of the debt, giving the
trust different options in the future to enhance earnings. The team
also point out one of the first moves made by the new US
administration was the formation of a new Department of Government
Efficiency, so 'efficiency' appears to be a positive theme in the
US, which SDCL counts as its single largest country exposure at
67%.
Without getting into the
flamboyant rhetoric, it is fair to say that the incoming US
administration has an agenda much less focused on 'energy
transition' and whatever the practical realities that unfold over
the next few years, this is a negative for investor sentiment right
now. We think SEIT's business model, while aligned with energy
transition, is relevant to customers with concerns about energy
security, either more locally due to extreme weather events, or
more widely due to geopolitical instability, as well as more
straightforwardly simply helping customers to reduce costs. Thus,
in our view, SEIT's business model doesn't really align with the
main negatives of investor sentiment, and as the board's plan to
address the discount unfolds, the current discount could prove to
be a significant opportunity.
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