Bargain Shares 2024: Take advantage of this lucrative wind-down

Triple Point Energy Transition (TENT) is an investment company focused on building a portfolio of infrastructure investments that support the energy transition. The company raised £100mn when it listed its shares, at 100p, on London’s main market in October 2020 with the aim of delivering predictable, long-term cash flows and targeting total NAV annual returns of 7-8 per cent per annum.

Despite making significant progress towards achieving these goals, the company has been impacted by the wider macro-environmental pressures being experienced by many of its peers. This, alongside sub-optimal liquidity in the shares, has contributed to a persistent share price discount that has restricted the company's ability to raise further capital and scale the business.

Fundamentally, the company’s diverse portfolio of 20 assets has performed in line with the objectives set out at IPO, exceeding the NAV return target in the 2023 annual results (to 31 March 2023) and delivering a 1.1 times covered dividend of 5.5p per share. However, having assessed strategic options for maximising shareholder value, the board believes that an orderly realisation of assets and return of realised capital is the best course. A circular setting out details of the proposals is expected to be posted to shareholders before the end of March, making this a potentially lucrative entry point.

The £3.9mn negative valuation movement reported in the six months to 30 September 2023, which led to a fall in NAV per share, reflected a shift in the weighted average discount rate (from 6.6 to 7.3 per cent) used to value the portfolio. UK government bond yields have contracted since then, a positive for the relative attraction of Triple Point’s assets. Assuming shareholders consent to the wind-down of the company, all the assets will be held for sale as current assets. This explains why Triple Point has a Bargain Shares rating of 1.64, a 64 per cent premium to its market capitalisation.

In terms of the portfolio weighting, around 54 per cent is invested in equity investments, compromising the £50.4mn (50.4p) hydro portfolio, with the balance of £43.7mn fixed-interest development and financing debt provided to investee companies. Half of the revenue generated from the well-diversified portfolio is linked to inflation over the next 13 years, and 93 per cent of income is underpinned by contracts over the same period. It provides shareholders with a reliable income stream that supports a fully covered 5.5p-a-share dividend which underpins the 9.5 per cent dividend yield.

Potential for disposals close to carrying valuations

Importantly, the quality of Triple Point’s assets provides scope for an orderly realisation.

For instance, the hydroelectric power assets benefit from the FiT, UK government-supported pricing that provides a payment for every kWh of electricity produced, and a price floor known as the export tariff. These FiT contracts account for 89 per cent of the revenue generated from the company’s hydroelectric assets, and enjoy annual indexation to the UK retail price index (RPI). However, if market prices are higher than the export tariff, generators can also enter power purchase agreements (PPAs) with commercial offtakers.

In 2023, FiT rates were adjusted upwards by RPI of 13.4 per cent, which boosted revenues and underpins the defensive and attractive nature of the portfolio. RPI is forecast to average 3 per cent from 2024 to 2031 and 2.4 per cent thereafter, highlighting potential for further income growth. Moreover, FiT contracts have a remaining duration of 11-13 years with high-quality utility counterparties, which mitigates risk. Also, the hydroelectric power assets have a useful life of 20 years beyond the remaining FiT period, during which time they will be operated as unsubsidised assets selling power to the grid through PPAs. They should be attractive to buyers. The same is true of Triple Point’s BESS assets.

BESS portfolio

The BESS portfolio has a total capacity of 110MW. The first two BESS assets, located in Oldham and Gerrards Cross, Greater London, are one-hour-duration battery projects with total capacity of 20MW each. They are both operational. The remaining two BESS assets in Newport, Wales and the Scottish Highlands are both two-hour-duration battery projects. They have total capacity of 50MW and 20MW, respectively, and are expected to be operational in 2024.

Triple Point has made secured loans of £10.1mn to the BESS operator and has committed to make a further £26.9mn of loans. Importantly, there is an equity cushion, with the loans equating to 46 per cent of the project cost, and all construction and connection cost or time overruns borne by equity and not debt holders.

Bearing this in mind, the operator of the BESS assets has offered to buy Triple Point’s £37mn debt facility at book value, of which £10.1mn is currently drawn. Assuming the transaction completes in the current quarter, it will deleverage the company’s balance sheet and enable a cash return to shareholders.

CHP plants

In 2021, Triple Point made £29mn of fixed-rate debt investments into a portfolio of three CHP energy service centre companies which deliver heat and power to glasshouses leased by APS Salads. The company is responsible for one-third of the UK’s tomato production and has more than 65 years’ experience in the area.

The harvest and glasshouse assets are based on the Isle of Wight, and use four 5.5MW Rolls-Royce gas engines to generate electricity. Instead of allowing heat produced by the combustion reaction to leak into the atmosphere, the CHP technology recovers the wasted heat and converts it to steam or hot water to increase the efficiency of the plant. The wasted CO2 emissions are recovered, too, to enhance crop yields.

In addition, Triple Point provided £8mn of debt funding to Spark Steam, an operator of a 6.6MW CHP energy plant in Teesside that supplies APS Salads with heat, carbon dioxide and electricity, as well as exporting excess electricity to the National Grid.

The CHP plants generate £2mn (2p a share) of interest income, a return of 8.2 per cent on the £24.4mn carrying valuation of Triple Point’s senior debt. The plants also generate less CO2 equivalent emissions, highlighting their green credentials.

Orderly wind-down to narrow share price discount to NAV

It’s not difficult to envisage a scenario in which Triple Point’s shareholders recoup more than 90p a share in cash returns over the next 12 months, or 55 per cent more than the current share price.

That’s because a sensibly priced disposal of the CHP and hydroelectric assets should return around £75mn (75p) of cash, the short-term energy-efficient lighting and Innova solar loan receivables are worth £9.1mn (9.1p), and the disposal of the BESS loan will free up £10.1mn (10.1p) of cash for shareholders. In addition, shareholders will bank a quarterly dividend of 1.375p a share while the disposal process is ongoing. Buy.

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