SDCL Energy Efficiency Income Trust plc (LON:SEIT) has today announced its financial results for the year ended 31 March 2023.
Highlights
· Net Asset Value (“NAV”) per share(APM) of 101.5p as at 31 March 2023 (31 March 2022: 108.4p), which includes a reduction of 7.3p from 70bps increase in weighted average unlevered discount rate in the year
· Investment cash inflow from the portfolio(APM) of £85 million, up 31% on a portfolio basis(APM) (2022: £65 million)
· Aggregate dividends(APM) of 6.0p per share declared for the year ended 31 March 2023, in line with target (March 2022: 5.62p)
· Dividend cash cover(APM) of 1.2x for the year to 31 March 2023 (March 2022: 1.2x)
· Target dividend[1] of 6.24p per share for the year to March 2024, a 4% year-on-year increase
· Loss before tax of £18.6 million for year to 31 March 2023 (31 March 2022: Profit of £79.8 million), includes unrealised loss of £81 million from discount rate increases
· Portfolio valuation(APM) of £1,100 million as at 31 March 2023, up from £913 million at 31 March 2022
· Investment of c.£240 million in new and organic investments and existing commitments during the year and a further c.£30 million invested since the year end
· Carbon savings of 1,202,528 tCO2 (March 2022: 1,060,617[2] tCO2) from Company’s portfolio
Tony Roper, Chair of SEEIT, said:
“This financial year has been marked by global economic instability as a consequence of the war in Ukraine, which has impacted discount rates and market valuations of all London-listed, income-oriented investment companies. SEEIT is no exception. However, the subsequent rise in energy prices has led to a growing focus by governments and corporates on the critical requirement to save energy. Demand for on-site generation, efficient distribution, and energy use reduction solutions continues to grow substantially. The Investment Manager has remained selective in making new investments, while focusing on unlocking additional value from the existing portfolio as it seeks to deliver attractive risk-adjusted returns for investors.”
Jonathan Maxwell, CEO of SDCL, the Investment Manager said:
“SEEIT has continued to generate solid levels of cashflow from its geographically and technologically diversified portfolio. Energy efficiency projects and solutions are a critical part of the energy transition. Generally, they offer major advantages in terms of speed and cost of implementation compared with new sources of utility generation. Specifically, energy efficiency projects that are delivering services to end users offer value enhancement opportunities. For SEEIT this means that value can be added by enhancing its existing portfolio and by investing in organic pipeline. More and more private and public sector counterparties are focused on meeting carbon targets, cutting costs, and enhancing energy security and resilience. SEEIT is ideally placed to invest in these solutions.”
SDCL Energy Efficiency Income Trust plc is a constituent of the FTSE 250 index. It was the first UK listed company of its kind to invest exclusively in the energy efficiency sector. Its projects are primarily located in the UK, Europe and North America and include, inter alia, a portfolio of cogeneration assets in Spain, a portfolio of commercial and industrial solar and storage projects in the United States, a regulated gas distribution network in Sweden and a district energy system providing essential and efficient utility services on one of the largest business parks in the United States.
The Company aims to deliver shareholder value through its investment in a diversified portfolio of energy efficiency projects which are driven by the opportunity to deliver lower cost, cleaner and more reliable energy solutions to end users of energy.
Past performance cannot be relied on as a guide to future performance.
CHAIR’S STATEMENT
On behalf of the Board, I am pleased to present the annual report and financial statements for the SDCL Energy Efficiency Income Trust plc for the year ended 31 March 2023.
This financial year has been characterised by global economic instability, driven by high power prices, high inflation, rising interest rates and energy price volatility in the wake of Russia’s invasion of Ukraine. Government interventions in energy markets responded to this environment with varying degrees of success. An energy crisis was followed by a liquidity and banking crisis as inflation, interest rates and bond yields rose quickly in the second half of the year, accompanied by recessionary concerns in major markets where the Company is active. A low interest rate, low inflation environment is unlikely to return in the short term.
Higher risk-free rates, and higher costs of capital, have fed through into the market valuations of all income-oriented investment companies listed on the London Stock Exchange. Generally, share prices moved from a premium to a discount to net asset value across the listed infrastructure sector.
The Board and the Investment Manager have reflected the higher interest rate environment in the Company’s valuation assumptions at the year end. SEEIT’s NAV per share declined to 101.5p in the year to 31 March 2023 and the Company recorded a loss before tax of £18.6 million, largely as a result of increases in discount rates applied in the valuation but including certain project specific adjustments described in Financial Review and Valuation Update.
The Company owns a large, diversified portfolio of energy-efficiency assets, which provide several opportunities for future growth. Our assets reduce energy wastage and are focussed on providing essential energy services often to essential industries. The range of technologies in SEEIT’s portfolio creates opportunity to provide a wide variety of energy solutions to end users, helping them cut costs; reduce their carbon footprint; and improve resilience.
One consequence of the tragic Ukraine war and its impact on energy markets has been a growing focus by governments and corporates on how to save energy. We believe that energy efficiency should be considered one of the three main “pillars” of infrastructure investment, alongside but distinct from (i) renewable energy and (ii) social and other infrastructure. More detail on what distinguishes energy efficiency is in Investment Proposition.
Portfolio and Financial Performance
The portfolio, as a whole, generated sufficient cash to comfortably cover the Company’s dividends paid in the year.
During this financial year, levels of volatility in global energy markets not seen for many years, and regulatory responses to them, created both short-term and “one-off”, setbacks for some of SEEIT’s investments. Both SEEIT Oliva and Värtan Gas were materially impacted by higher fuel costs combined with regulatory changes that have since been updated or appealed. At the same time, some investments, such as Primary Energy, Värtan Gas, Onyx and Future Energy Solutions faced specific operational challenges.
Details in relation to the operational performance of specific projects and asset management initiatives undertaken during the year are outlined in Portfolio Summary.
While SEEIT’s portfolio is positively correlated to inflation over the medium to long term, in the short term, increases in labour costs impacted returns on certain investments. Although most of the debt financing at the project level in SEEIT’s portfolio was secured on fixed terms or hedged at relatively attractive terms, rising interest rates increased some project-level borrowing costs.
Notwithstanding these challenges, several investments have also made progress, with for example RED-Rochester, Onyx and EVN all presenting opportunities to deliver additional long-term value.
The Investment Manager is focused on outperforming the Company’s return target. In an environment characterised by a higher cost of capital, and given the upside performance potential from the portfolio, we remain confident that the Company can meet or exceed its stated target net total return of 7-8% per annum[3] from its IPO price over the medium to long term.
Capital Structure
The Company secured successfully the equity capital it needed through a £135 million fundraise conducted in September 2022, shortly before capital markets effectively closed. We are grateful for the support that shareholders have given SEEIT since its inception.
This fundraise, along with the existing revolving credit facility (“RCF”), underpin the capital position of the Company, allowing it to manage liquidity, invest in growth across existing portfolio projects and, as suitable opportunities arise, make attractive new investments.
The Company continues to pursue a low-gearing(APM) strategy relative to the wider infrastructure peer group, with consolidated outstanding debt across the Group representing approximately 32% of NAV as at 31 March 2023, in line with the Company’s medium-term structural gearing(APM) target of 35%. We do not have any near-term refinancing risk. Further details in relation to the Company’s existing leverage can be found in Financial Review and Valuation Update.
As we are more focused on value enhancement from the Company’s existing portfolio and our organic pipeline than on sourcing new investments, our existing liquidity is considered sufficient for the foreseeable future.
Investment Activity
The Investment Manager has been focused on initiatives within the existing portfolio, which involves identifying sources of additional revenue, reducing costs or investing incremental capital for accretive returns. Planning and implementation of these initiatives takes time, and while some value enhancement activity has been recognised in our current valuation of the portfolio, the majority will not be recognised until its implementation is proven.
During the year, SEEIT invested c.£121 million into six new investments and commitments and a further c.£119 million into organic follow-on investments and commitments across 16 existing portfolio projects. Since the year end, a further two new investments of c.£4 million, plus a further £26 million in follow-on investments across four existing portfolio projects have been made. Details of these investments are provided in Portfolio Summary.
The Investment Manager continues to focus on new opportunities associated with our existing portfolio (the “organic” pipeline) typically at rates of return above our stated investment objectives, as opposed to acquisitions of new projects in the market. Opportunities for capital growth could also include utilising the capacity the Company has to increase selectively its exposure to construction and development phase investments.
SEEIT generally approaches investment opportunities with the intention to acquire and improve assets and will thus typically hold an investment to the extent that it is consistent with total return targets and until value has been optimised. The Company will contemplate disposing of assets opportunistically or via targeted sales where it considers that doing so would deliver value to shareholders. SEEIT materially exited one investment during the financial year, through early repayment of its loan to the Biotown green gas project in the United States at a return above expected return for this investment. Disposals of less strategic or smaller projects, where a third party could derive greater value, are being evaluated.
Dividends
In line with previous guidance, in June 2023 the Company announced its fourth interim dividend for the year ended 31 March 2023 of 1.50p per share, providing an aggregate dividend of 6.00p per share declared for the year ended 31 March 2023, which was fully covered by net cash income.
Based on our assessment of current cashflow forecasts, the Company is announcing new dividend guidance of 6.24p per share for the year to 31 March 2024 (an increase of 4%) and as before, targeting progressive dividend growth thereafter.[4]
Share Price and Buyback Programme
As noted above, rising interest rates had a major impact on the valuation of listed infrastructure since September 2022, compounded by a dislocation in markets where demand from buyers did not match pressure from sellers, particularly those needing to raise liquidity to manage redemptions.
We do not believe that SEEIT’s recent trading price reflects the value of the portfolio or its total return prospects and took proactive steps to address this.
On 3 April 2023, the Company announced a share buyback programme in response to the discount at which its share price traded relative to its reported NAV per share(APM). As at the date of this report, the Company has deployed c.£14 million of the £20 million total buyback allocation.
Corporate Governance and Stakeholder Engagement
The Company held its Annual General Meeting (“AGM”) on 12 September 2022, at which all resolutions were duly passed by shareholders. The Articles of the Company provide that a continuation vote be put to shareholders at the first AGM following the fourth anniversary (which falls in the current year) of initial admission and, if passed, at every third AGM thereafter.
Investment companies undertake continuation votes alongside share buybacks as a means, inter alia, for discount control. Share buybacks can be an effective means of managing short-term dislocations between price and value. Continuation votes provide investors with the ability to mitigate any long-term fundamental problems with value itself. The Board recognises the importance of this mechanism for shareholders and believes that there is no fundamental concern with the Company’s prospects and our ability to deliver value for shareholders. Despite the current macroeconomic situation, we believe the Company is well positioned, with substantial scale and a diversified portfolio able to deliver attractive returns. Further details of the Company’s first continuation vote will be provided to shareholders in the notice of the 2023 AGM.
The Investment Manager hosted a Capital Markets Day on 14 March 2023 at the London Stock Exchange. The event explained the key market drivers for energy efficiency and provided greater insight into some of the Company’s larger holdings.
The Board was pleased to visit SEEIT Oliva in Spain during the year and was able to engage directly with members of the management and operations teams at one of SEEIT’s larger portfolio of investments to understand the key risks and growth drivers of the projects concerned.
Over the past few months, I have met with some of SEEIT’s larger shareholders to discuss their expectations and collect feedback on the performance of the Company. These meetings have been helpful in shaping the Company’s disclosure in this Annual Report, which we have revised and expanded, both at Company level and at project level for our larger investments. The Investment Manager and I look forward to continuing regular dialogue with investors going forward.
Outlook
SEEIT is well positioned to be able to unlock long-term growth opportunities from its established and diversified portfolio of investments. Energy efficient technology is a critical part of the energy transition because its implementation is typically much quicker and cheaper compared with the time and cost to develop new sources of energy generation.
More and more private and public sector counterparties are focused on meeting carbon targets; enhancing energy security and resilience; and seeking to better manage energy price volatility. Demand for on-site generation, efficient distribution, and demand-side reduction solutions continues to grow substantially.
The Investment Manager has remained selective in making new investments and continues to evaluate organic and inorganic investments that can deliver attractive risk-adjusted returns for investors. The Company remains well capitalised, with a strong balance sheet and low levels of gearing(APM) relative to the infrastructure investment company sector.
The Board recognises the current challenges facing UK-listed investment companies, and is working with the Investment Manager to ensure that SEEIT manages and adapts to the current market dislocation evident across the sector. Our objective is to provide top quartile levels of disclosure to help investors better understand current performance and the long-term prospects of SEEIT, which we expect will evolve. I would like to thank personally all our shareholders for their continued support of the Company, and I look forward to continued engagement in the year ahead.
Tony Roper
Chair
NOTES:
[1] The target dividend stated above by the Company is based on a projection by the Investment Manager and should not be treated as a profit forecast for the Company
[2] Per SEEIT’s ESG Report, November 2022
APM Alternative Performance Measure: See Glossary Of Financial Alternative Performance Measures for further details for APM’s used throughout this report.
[3] Net of fees and expenses by reference to the IPO Share Price of 100.0 pence per share
[4] The target dividend stated above is based on a projection by the Investment Manager and should not be treated as a profit forecast for the Company
