Greencoat UK Wind PLC (LSE:UKW)'s (UKW) investment proposition has been a "relatively simple, but attractive one" honed over 10 years, according to a recent note from research house Kepler,
The firm invests in wind farms at a 9% IRR, utilises modest, low-cost debt, and pays an inflation-linked dividend. Surplus cash flows, expected to be around £200 million annually after dividends, are channelled into growing the NAV.
Kepler points out UKW's robust balance sheet, which is further bolstered by the company's "self-funding" nature, eliminating the need for equity issuance.
This approach could potentially narrow the current share discount. At present, UKW offers an enticing 6% prospective dividend yield, significantly outpacing the GRY of long-term government bonds.
Beyond the dividend, Kepler finds the 10% NAV return prospect appealing, especially given the conservative assumptions underpinning it.
The portfolio has demonstrated resilience against downside power price sensitivities, with potential upsides in areas like inflation, asset life extension, and the interest rate cycle.
However, Kepler also flags potential concerns. UKW will need to refinance some fixed-rate gearing in the coming years, possibly at higher interest rates. This gearing could amplify underlying asset valuation movements, and the long-term assumptions might prove overly optimistic.
The shares were marking time at 138p each early on Thursday, valuing the business at £3.2bn.