Looking inside the TENT

Yields 10% and discounted at 43.4% from ask price.

4th November 2023.

TENT Essentials

51p bid/55p ask, £100m opening NAV, 100m shares, 97.1p NAV, Dividend Cover 1.1x, Gearing £40m RCF (£35.5m used)

Thesis

Interest rate rises have unfairly punished green energy investment trusts in 2023.

The risks are relatively low; the rewards are consistent and high. There is upside through the oversold existing portfolio as well as the Fund Manager’s access to portfolio assets with higher returns.

Photo by American Public Power Association on Unsplash

The Investment Manager of TENT, Triple Point has had a tough year. All 3 of its Investment Trusts SOHO, TENT and DGI9 are all in the wars.

I must admit I bought SOHO and flipped it for 10% gain, and not looked back. But I’ve been a holder of TENT for a while, and more recently bought DGI9 (on recent price weakness) and tempting assets.

The great thing about TENT is like it’s playing Sim City. You get to own hydro, CHP, LED, BESS but you’re not speculating on the “traditional” forms of renewable energy. Its focus is on overlooked areas of the energy transition.

And it works! In my opinion, anyway. Here is the portfolio:

Equity:

Hydroelectric portfolio I: Six operational, Feed in Tariff (FiT) accredited, run of the river hydroelectric power projects in Scotland, with total installed capacity of 4.1MW, for an aggregate £26.6m

Hydroelectric portfolio II: Three operational, FiT accredited, run of the river hydroelectric power projects in Scotland, with total installed capacity of 2.5MW, for an aggregate £19.6m.

Debt:

Harvest and Glasshouse: £21m of senior debt finance to two established combined heat and power(CHP) assets, located on the Isle of Wight, supplying heat, electricity and carbon dioxide to the UK's largest tomato grower, APS Salads (APS). Carbon dioxide from the gas turbines is fed to the plants so it’s less carbon intensive.

Spark Steam: £8m of senior debt finance to an established CHP plant in Teesside supplying APS Salads, as well as a further power purchase agreement through a private wire arrangement with another food manufacturer.

Battery Energy Storage System (BESS) portfolio: Debt facility (and revenue share) of £37m to a subsidiary of Virmati Energy forthe purposes of building a portfolio of four geographically diverse BESS assets in the UK with a total capacity of 110MW. This beceomes fully deployed during 2024.

Energy-Efficient Lighting: Funding of £2.2m to a lighting solutions provider to install efficient lighting and controls at a leading logistics company

Latest Results

The recent Q1 results were that there was a £1.15m uplift in the portfolio "actuals" based on asset outperformance. But a £3.5m negative, mainly due to an increase to discount rates used (a theoretical measure based on the value of assets relative opportunity cost of so called "no risk" yields - more on that in a moment) so a negative £2.3m “loss” in the NAV (including income in and dividends paid).

What caught my eye in the Q1 2024 results:

1. Operational outperformance - underlying strength from the assets particularly the Hydroelectric which is a renewable form of base power, and by building pools and weirs the energy generation can be throttled and controlled - for dark, windless nights when energy prices are at a premium.

2. BESS (Battery Energy Storage) have 94% contracted cash flows and a 8.6% levered ROI - described as "compelling returns". Commissioning on track for 2024.

3. Innova (who are building out solar and BESS assets) is returning "materially higher" than the anticipated 7-8% return for TENT. They received a further £200m funding from elsewhere, which de-risks the existing debt instrument from TENT.

4. Despite higher discount rates impacting NAV the discount to NAV remains disproportionate.

5. Earnings over NTM will grow further above 100% dividend cover so will we see dividends rise? Possibly, but TENT speaks to compelling opportunities but that can lead to NAV growth.

Capital Markets Day

Apart from re-iterating the strength and safety of the existing portfolio and putting some further colour on the different equity and debt assets, there were some encouraging signals from this were plans to invest in Hydrogen Electrolyser at a 9.9% return as well as BESS opportunities at a 10% return or energy generation/consumption at 10.1%. Including the £40m of available gearing which is at a fixed 6% cost (£2.4m a year at full use) leading to a potential is a £1.6m margin or 1.6% (£4m - £2.4m) on top of 10% returns (£10m on £100m theoretically).

TENT spoke to a future possible 1.2X dividend cover. i.e. possible higher dividends.

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Good Company?

When you read that the fellow investors are East Riding of Yorkshire Council, Aviva, Schroder, and many other big names and these hold over 68% of TENT. You have to wonder why this is trading on such a large discount?

Risk

The Equity part of the portfolio (42.4%) is arguably more risky but is Hydro a risky play? It rains in Scotland. A lot. Hydro is an interesting asset (perhaps one of the highlights of TENT) because you damn a river and get paid as the water flows through. Hydro is base energy and whilst, yes, there’s more energy in the winter one can to some extent store the water and control the flow rates and therefore get “free” energy storage without the cost (and limited life) of BESS. The turbines are monitored and controlled and there’s (according to Aquila European) no finite life. In fact many hydro electric facilities worldwide have been running for well over 50 years on the same installed equipment (albeit with maintenance and repairs). Can Solar or Wind last as long? Not a chance.

Debt (57.6% of portfolio). Notice I played a bold on the word SENIOR in the portfolio list. So TENT has some fairly robust criteria over debt and therefore when people compare bank interest or bonds of some 5-6% versus this I struggle to differentiate. In fact TENT has 50% inflation and index-linking. You show me where you get 10% plus 50% index linking. It doesn’t exist. Except at TENT.

Cash flow generative - it’s also the case that debt is amortising from TENT’s debtors back to TENT. So there is over £6m of debt capital being repaid per year as well as income returns from that debt.

There are risks to energy plays of course. The weather, of course. What if it doesn’t rain in Scotland and the rivers run dry. The UK government’s windfall tax being another example of risk - although this didn’t recently affect TENT, because its portfolio is too small (from memory the tax affected assets 10MW and above).

Valuation risk therefore feels well insulated and counterparty risk is mitigated by a spread across a range of counterparties many of whom are government backed.

Revenue risk is one of the best in its peer group. Even over the long run.

Conclusion - 60/40 portfolio.

The yield is incredibly good considering we’ve had the Ukraine War and energy spikes in 2022. We are not out of the woods in 2023 in the UK. In the event of another energy price spike do assets like these suddenly become highly desirable?

Thinking on a “traditional” 60/40 portfolio, I’ve a 100/0 portfolio. Think a lot of people who are “active private investors” are the same. But my answer to that is to operate a virtual 60/40 by holding stocks like TENT.

What do you think reader?

Rather than bonds I'd prefer to have 94% contracted and >50% inflation linked returns on assets that I'm getting for almost half their actual value, rather than buy anything a government would provide me at a theoretical "no risk" so despite NS&I temporarily offering 6.2% rates (now withdrawn) this is what I consider my “low risk/no risk”. While Oak is not an acorn he has time in his investment horizon to say things like this. I appreciate other people wouldn’t agree with my assessment here nor would my level of risk tolerance be suitable for all.

This is my opinion and I hope you enjoy reading my thoughts but this is not advice.