Good evening reader,
Today’s combined news of TENT’s H1 results and a proposal to effect an orderly disposal of assets (i.e. closure) came as a little bit of a surprise. It would seem certain shareholders are pressing for this. If we examine the register, 51.06% of shareholders are IIs. 20% are pension funds - activist? I think not. 14.2% are hedge funds - activitist? Probably. The 16.8% remainder are fund managers, probably grappling with dis-orderly outflows. Activist? Definitely. Liontrust for example reported dreary results recently.
So probably 30% are pressing for this. And 70% probably aren’t?
Why give up 9% returns (which are interest streamed) in a more benign inflationary future environment when there’s a recession looming? The message boards are full of
”the 70%s”
So reader, if like me you are a bit bemused by the news then let’s stand up to the motion and reject it. It will only happen with our vote.
Let’s examine why:
Charge!
The OCF is about 2.3% (fee agreement is 0.9% of NAV and expenses are £1m a year) so it’s high but for this kind of fund it’s not going to be low. With NAV at £100m this isn’t exactly giving triple points to Triple Point with fees sub £1m. 80% is received as cash and 20% of that buys shares for the Investment Manager.
Field
Today’s numbers show a negligible cash position. However Field is worth £37m NAV and a £37m cash offer has been made. Should they sell? The NAV unfortunately understates the true value of the portfolio. 4/7 of the BESS are not yet complete and once energised (in around 9 months time) and operational the NAV jumps. This is commonly the case across other BESS holdings, and it’s salutory that just one year ago these BESS portfolios were at a 20% premium to NAV for exactly this fact.
TENT’s return on BESS as 8.6% plus there’s revenue share. Average returns for BESS are 10.1% according to the capital markets day presentation. The RCF meanwhile is fixed at 6% until 31/3/25. While, yes, extending that RCF today would probably be at 7-8% rate, will it remain so high next year? Judging even by the dovish tone coming out of the Fed this evening we are seeing their “dot plot” projection of a 0.75% drop in 2024. As tempting as £37m of liquidity would be right now, this feels like a re-run of Triple Point’s DGI9 and the sale of Verne, its data centre business.
Discount Rate
If you strip out the “noise” of discounts which in time will reverse, then the NAV grew and funded the dividend. Not a bad result in a harsh environment.
I see the discount rate “drops” as “rises in abeyance”. Hidden value even. There’s no actual reason for the reduction other than TENT are following what Mazar tells them to do. Mazar in turn is modelling “perceived risk of future cash flow” and because we had a dri(er) summer and less rain the hydro power is deemed less valuable. 2/3 of power generation and value are in the winter months. Mazar tracks market transactions too. But when I investigated whether they had their finger on the pulse of renewable energy they offer 3 articles from 12 months ago. Hmmm. You’ve nailed it Mazars. Clearly.
Remember too reader, in my article LOOKING INSIDE THE TENT Q1 2024 was an outperformance for hydro, so we are talking about a Q2 underperformance. A single season determines quite a bit it seems for Mazars. Judging by the weather outside my window, since the 1st October, we are looking at a Q3 outperformance for Hydropower once again and egg on Mazar’s faceless face.
Other
£0.5m was lost through 3 hydro turbine breakdown and through lower yields due to lower rainfall. So there’s a double whammy to the NAV from “other” and “discount” due to hydro. They describe the breakdown as a one off.
Power Prices
A double becomes a hydro triple whammy because the Hydro is also the cause for a loss here also. If you read a newspaper you’ll know that COP28 finished this morning. The key announcement is the phasing out of fossil fuels. Is that positive or negative for a baseload power form of electricity generation, reader?! Let’s not forget too that the current FIT for Hydro is £201/MWh. It generates 19,7000MWh a year worth about £4m. From a £46.2m asset.
Again, I see this as a future rise in abeyance. Hidden value. My electricity provider announced a chunky rise for electricity today. All the forecasts I see is that wholesale electricity - particularly baseload isn’t going to spiral downwards in price as MAZARS seems to think…... who does MAZARS get their electricity from? Clearly I need to switch to this mythical world where future electricity will be as cheap as MAZARS claim. Common sense tells you this future wholesale power price drop doesn’t feel right - despite what some expert advising TENT seems to think. Common sense suggests this will reverse in the not too distant future, in my opinion.
The discounting is kind of the equivalent to DEC’s IFRS9 challenge where they have to assume the sky is going to fall in on their hedges. The future hasn’t happened yet and it’s the actuals that actually matter.
Interest Rates and the pivot
The mythical 6.2% interest rate from NSI is no longer available. If UK interest rates follow the US and drop by 0.75% in 2024 then what do you think will happen to bank saving rates? I expect the outflows in the capital markets will reverse. The wall of money sitting on the sidelines moves back. Bill Ackman thinks this will begin to happen in Q1 2024. Cathy Wood shows compelling evidence (in my opinion) for deflation in 2024. See below. The world has rapidly altered in the past 12 months. The same for the 12 before. And the 12 before that too. Why shouldn’t the next 12 months be a far faster pivot than expected? I don’t think we should be surprised about being surprised. Except if the various people who claim this are right then it’s no surprise.
NAV Discount
The chief solution to the discount is time, and positioning the portfolio positively as recession proof and defensive, rather than anything else. The hydro assets, the CHP, the BESS assets are all very marketable, very ESG, and some of the other future ideas TENT have are interesting too. Hydrogen electrolysers for example. They are in keeping with what will progressively need to happen to achieve NET ZERO. A future fundraise for a trust with an exemplary track record on market-leading returns with quirky assets you can’t get anywhere else is interesting. TENT did a decent job marketing the portfolio at the capital day presentation in September.
I do appreciate today’s 11.3% jump are people speculating on whether 80p or 90p realisation is achievable. In time, so much more is achievable. This discount won’t last forever. We are nearing the end of despair stage of the business cycle. Everyone is bombed out, exhausted, fed up, frustrated, nursing some losses. Who will be selling TENT tomorrow? Ghosts? Because all the human sellers have left the TENT.
VOTE NO!
So reader, if you are a TENT dweller I urge you to vote to reject this proposal. I appreciate a cheeky 75p-80p sell off gives a 20% upside to today’s recovery price of 65p and might sound nice. A cheekier 90p-95p 40+% upside is theoretically possible. But very, very unlikely in this environment.
TENT offers a much lower risk than any bond could offer. It offers attractive assets which are attractive to income/defensive/ESG investors. It offers protection from its defensive nature, a high yield, some capital returns and - if it survives the vote - I’m convinced the discount will disappear in time.
A final thought
Another reason for TENT being on a large discount (along with all its peers) is also down to UK regulation and specifically OCF and cost reporting. Alongside this the rise of passive and index investing. I assume my typical reader is a sophisticated investor which is how you found the Oak Bloke. I don’t think I have too many unsophisticated investors reading about investment trusts. TENT is not in any ETF. You can’t reach TENT via the likes of Blackrock or Vanguard. Even if an unsophisticated investor did chance across it would an OCF of 1.4% frighten? They might assume it’s dead expensive and run a mile. Yours truly when he was but a Sapling would’ve run a mile. If trees can run.
This article is fascinating in this regard:
https://portfolio-adviser.com/calls-for-judicial-review-into-fca-as-investment-trust-sector-faces-extinction/
So will we see some sort of reset from government that incentivises investment into investments into “real” business. I know, I know, ETFs fund real business too. But stop and consider how skewed some investments are. The magnificent 7 on eye watering valuations. Is that due to ETFs? Probably. When nearly 70% of a world ETF is the USA and of that 70% a large number within that is the magnificent 7, no wonder there’s starvation of capital at TENT and beyond.
This is not advice.
Oak