Daily News 8 Feb 2023

Menhaden Resource Efficiency (MHN) | Buybacks

Market Cap:

£74m

Yield:

0.2%

(Disc)/Prem:

(34%)

Sector:

Environmental

The Board notes the recent widening of MHN’s discount. At the AGM on 22 June 2022, shareholders granted the authority to repurchase shares, within certain limits. The Board is “actively considering” using this buyback authority where it believes it is in shareholders’ best interests, in view of the significant discount on which the shares are trading.

DP Aircraft I (DPA) | Debt restructuring

Market Cap:

£12m

Yield:

0.0%

(Disc)/Prem:

(73%)

Sector:

Leasing

THAI Airways International, the lessee of DPA's two aircraft, was placed into a "Rehabilitation Program" in order to "ensure its commercial viability" following the impact of the Covid-19 pandemic on aviation. This program ended on 31 December 2022, and is now being replaced with new fixed lease rentals of $510k per aircraft per month. $2.4m of surplus cash was generated over the duration of the program.

As a result, DPA has negotiated revised debt arrangements. The total loan amount outstanding of $97.9m will be split into $62.4m of scheduled, amortizing debt (Tranche 1) and $35.5m of deferred, non-amortizing debt (Tranche 2). Interest rates on both tranches will be fixed, and the interest rate swap currently in place will be dissolved. Surplus cash will be used to repay debt on Tranche 1. $500k per aircraft will be retained by DPA to cover unforeseen costs. $35k per month per aircraft will be retained by DPA to contribute to ongoing fixed costs. Lenders have refrained from charging restructuring fees at this stage, to receive a fee after the eventual remarketing of the aircraft.

Chrysalis Investments (CHRY) | Jupiter policy change

Market Cap:

£470m

Yield:

0.0%

(Disc)/Prem:

(38%)

Sector:

Private Equity: Growth Capital

Jupiter Asset Management CEO Matthew Beesley published a letter to investors announcing agreement to sell all open-ended fund exposure to Starling Bank to existing Starling Bank shareholders, as "investor sentiment towards holding unlisted assets in open-ended funds has changed". From now on, no new investments in unlisted assets will be made through Jupiter's open-ended funds.

CHRY announced that it has agreed to purchase £20m of equity in Starling Bank via a secondary market transaction. Subject to closing conditions, Starling Bank would represent c.15% of the portfolio (12% as at 30 January). This secondary transaction was not part of the potential follow-on commitments of £20m disclosed earlier this month. As announced on 1 February, the fund's gross cash position as at 30 January was £69m (total liquidity £81m).

Winterflood View: We believe that Jupiter's policy change is sensible, as we have regularly covered the pitfalls of investing in illiquid assets through open-ended vehicles, from IMF warnings regarding this very topic, to property fund suspensions by the world's largest investors. The closed-end fund structure clearly is a more suitable mechanism to deliver liquidity transformation, and we applaud Jupiter for formalising this recognition. With regard to Chrysalis Investments, we would caution that a 15% concentration in Starling Bank would be among the larger single holdings across the investment trust universe. This does not preclude success, as 3i Group's concentration in Action clearly illustrates, but it does present a risk which investors should monitor closely, particularly given Starling Bank's youth, single-country exposure and vibrant competitive landscape.

Foresight Solar Fund (FSFL) | NAV update

Market Cap:

£715m

Yield:

5.9%

(Disc)/Prem:

(7%)

Sector:

Renewable Energy Infrastructure

NAV per share broadly flat over Q4 2022, +16.9% over the year to 31 December 2022 (126.5p). Net assets: £771.5m.

Q4 2022 NAV drivers: Uplift from post-construction revaluation (Virgen del Carmen) [+0.8p] and inflation [+4.2p], offsetting the impact from lower power price forecasts [-4.1p] and the impact from the UK Electricity Generation Levy (EGL) [-0.2p].

Assumptions: Short-term UK inflation forecast updated to 6.5% for 2023, adding a further 3.2p per share. Medium and long-term inflation assumptions remain unchanged at 3.0% from 2024. Q4  2022 power curves generally reflected a fall in short and medium-term pricing, long-term forecasts remain anchored. The impact of the EGL was offset by the unwinding of discounts applied to baseload power price forecasts for 2023 incorporated in the Q3 NAV.

Portfolio generation:  +2.3% over the year. Above estimated generation in the UK (+8.6%) offset lower production in Australia (-12.5%). 125MW Spanish portfolio is now fully operational and is “expected to make a significant contribution to revenues in 2023”.

Contracted revenue: 79% for 2023, 75% for 2024 and 66% for 2025. Dividend cover 1.74x for FY22, with dividend cover for FY23 expected to be at least 1.50x and at least 1.0x until FY25.

Balance sheet: £524.8m total outstanding debt representing 40.5% gearing (based on £1,296.3m GAV) vs. 50% policy limit.

Pipeline: Preferential right over 600MW of UK solar projects. Engaged in exclusive negotiations for the full project rights to a further 50MWp ready-to-build battery storage project, with a completion date targeted for Q1 2023. The investment manager is looking to extend the duration of battery assets yet to commence construction.

Notice of results: FY22 results expected to be published on 15 March 2023.

HydrogenOne Capital Growth (HGEN) | NAV update

Market Cap:

£99m

Yield:

n/a

(Disc)/Prem:

(21%)

Sector:

Renewable Energy Infrastructure

NAV per share +0.8% over Q4 2022, +1.6% over the year to 31 December 2022 (97.3p). Net assets: £125.3m; portfolio valuation: £106.8m.

Q4 2022 NAV drivers: Uplift in private equity valuations (+1.6p). Weighted average portfolio discount rate reduced by 0.1% over the quarter to 12.9%.

Revenue: Private investments account for 83% of the portfolio. 7 of the 9 private investments are revenue generating. Revenue +110% YoY to £33m in 2022. 

Investment activity: Over Q4 2022, HGEN invested an additional €1.25m in Strohm as part of a €29m funding round, bringing its total investment to €11.25m. Post period-end, £1.4m invested into Cranfield Aerospace Solutions Ltd and £2.5m invested in a green German hydrogen project (Thierbach Project). We covered the announcement here.

International Public Partnerships (INPP) | Notice of results

Market Cap:

£2.9bn

Yield:

5.0%

(Disc)/Prem:

(3%)

Sector:

Social Infrastructure

Annual results for the period ending 31 December 2022 will be published on 30 March. A presentation will be held on the day; register via jenny.boyd@fticonsulting.com.

SDCL Energy Efficiency Income Trust (SEIT) | Capital Markets Day

Market Cap:

£1.0bn

Yield:

6.3%

(Disc)/Prem:

(16%)

Sector:

Energy Efficiency

CMD will be held on 14 March at 2:30pm. Register to attend virtually here, or email seeit@tbcardew.com to attend in person.

Civitas Social Housing (CSH) | NAV update

Market Cap:

£364m

Yield:

9.4%

(Disc)/Prem:

(46%)

Sector:

Property: UK Residential

IFRS NAV per share -3.4% to 110.93p in Q4 2022, reflecting slight widening of valuation yields and mark-to-market movements of financial swaps/caps on debt facilities. Over the period the portfolio’s average net initial yield increased from 5.27% to 5.45%. Rent roll increased with inflation and lease billings continue to reflect CPI increases. Dividend of 1.425p per share declared in respect of period, in line with target of at least 5.70p for FY to 31 March 2023 (FY22: 5.55p). All debt facilities now 100% fixed with drawdown of new 5-year £70.8m facility to replace certain existing facilities on track for completion as planned later this month. It was noted that “the Board continues to work proactively with its advisers to explore options for reducing the discount and enhancing shareholder value”.

Winterflood View: Relative to other Property investment trusts, CSH’s NAV proved resilient in Q4 2022, which we attribute to its inflation-linked leases. As was the case in its trading update published last week, these latest results once again highlighted the specialist nature of the portfolio’s properties, which makes them exempt from caps on housing benefits. This appears to be an attempt by the fund to distance itself from the issues facing Home REIT, where some tenants are having difficulty reclaiming housing benefits from the government, albeit we note that CSH has acknowledged that one of its tenants is currently in rent arrears.

The fund is now trading on a 46% discount to its 31 December NAV (based on yesterday’s closing share price) and we would expect future capital values to continue to be partially protected by the portfolio’s strong inflation linkage. In our view, there is potential for a notable re-rating from this level, if the specialised supported housing sector can mature and the tenants can be professionalised. We note CSH’s commitment to assisting tenants in achieving regulatory compliance, but we suspect that it will take a more structural change for investors to regain full confidence in the social housing sector and we would expect any future regulatory updates to continue to weigh on the share price. It will be interesting to see what actions the Board proposes to reduce the discount, given that previous share buybacks have not led to a sustained re-rating and noting the illiquid nature of the underlying portfolio.

Custodian Property Income REIT (CREI) | NAV update

Market Cap:

£399m

Yield:

6.1%

(Disc)/Prem:

(9%)

Sector:

Property: UK Commercial Diversified

NAV per share -12.2% to 99.8p in Q4 2022; NAV TR -11.0%. LFL portfolio capital value -9.1% to £612.8m vs MSCI UK Monthly Property Index -15.6%. Fall in portfolio value driven by market-wide repricing of UK commercial property, partially offset by +0.5% increase from active asset management activity. £13.5m of disposals during the quarter, achieved at valuation. 10 new lease agreements signed, 7% ahead of ERV. 2 rent reviews settled, with aggregate rental increase of +18%. LFL rent roll +1.4%; LFL ERV +0.6%. EPRA occupancy improved from 89.3% to 89.9% due to letting 5 vacant properties. 48% of vacancy is subject to refurbishment or redevelopment, 8% was let post period-end and a further 8% has been put under offer for sale or lease.

EPRA EPS +7% QoQ to 1.5p, due to £18m of net investment into acquisitions during previous quarter and asset management initiatives. Dividends of 1.375p per share declared in respect of quarter, in line with target of at least 5.5p for FY to 31 March 2023 and fully covered by EPRA earnings (102% cover YTD). CREI has £175m of drawn debt, of which 80% is at a fixed rate of interest and with a weighted average cost of 3.7%. There are no facility expiries until September 2024 and agreed facilities have a weighted average term of 6.1 years. As at 31 December 2022, the net LTV was 27.1%.

Winterflood View: We think that it is impressive that CREI managed to outperform the wider market in Q4 2022 in terms of its LFL portfolio valuation fall (-9.1% vs -15.6%), given its overweight exposure to Industrial assets (48% of portfolio value at 31 December 2022 vs 34%), which have been hit particularly hard in recent months. We suspect that this can be attributed to the portfolio’s focus on higher-yielding, smaller lot sizes, which were less susceptible to the market re-pricing, while valuations were also supported by asset management activity. We think that the prospective dividend yield of 6.1% is attractive, particularly as it is fully covered by earnings, although we note that the quarterly dividend rate remains the pre-pandemic level. Based on yesterday’s closing share price, CREI is currently trading on a 9% discount to its 31 December NAV, which is a considerably higher rating than the majority of its diversified UK commercial property peers. As a result, we think that better value opportunities exist elsewhere in the sector.

BH Macro (BHMG) | Issuance

Market Cap:

£1.3bn

Yield:

0.0%

(Disc)/Prem:

2%

Sector:

Hedge Funds: Macro

With regard to the issuance proposed on 23 January and approved on 6 February, the initial issue price will be 431.5p and $4.47 for the Sterling and US Dollar share classes respectively (NAV as at 3 February 2023 plus a 2% premium).