RBC Capital Markets has cut price targets across its UK-listed renewable energy fund coverage by around 10% on average, warning that dividend sustainability, limited capital recycling and elevated discount rates will continue to weigh on the sector in 2026.
By contrast, infrastructure funds remain preferred, with RBC reiterating 'outperform' ratings and price targets for 3i Infrastructure PLC (LSE:3IN), HICL Infrastructure Company Limited (LSE:HICL) and GCP Infrastructure Investments (LSE:GCP).
In a wide-ranging note, RBC highlighted the growing divergence in performance between infrastructure and renewable investment companies.
Total shareholder returns for renewables lagged infrastructure by 12 percentage points in 2025, with wind and solar names hurt by falling power price forecasts, low wind speeds, and growing investor scepticism following failed mergers and shareholder revolts.
“While we view renewables as oversold at current levels, the scope for self-help remains constrained,” the analysts wrote, citing high gearing, limited buyback capacity, and investor resistance to strategic changes.
The note follows the collapse of proposed deals such as the HICL–TRIG merger and Bluefield Solar’s restructuring, both of which were opposed by shareholders.
RBC maintained its preference for total-return strategies and high-yielding wind portfolios such as Greencoat UK Wind and Greencoat Renewables, both rated 'outperform', while flagging downside risks to solar names, including Bluefield, Foresight Solar and NextEnergy.
Dividends remain covered in 2026, but RBC said solar funds face growing risk from 2027 due to lower cash flow resilience, high payout ratios, and rising leverage.
The firm expects the UK government’s consultation on Renewable Obligation Certificate indexation — due by end-Q1 — to be a key regulatory event, with potential negative NAV impacts of up to 10% under one of the proposed options.
At a portfolio level, RBC estimates core renewable funds are now geared at around 45% of gross asset value, up from historical norms due to falling NAVs.
This rising leverage has curtailed buybacks and constrains optionality. Despite this, current share price discounts to NAV average over 30%, with implied equity risk premiums of 7% (a record high), suggesting investor scepticism is now fully reflected in valuations.
On valuations, renewables trade on average at 7–8 times 2026 EV/EBITDA, with free cash flow yields of up to 26% in some cases, though RBC cautioned these high yields partly reflect amortising asset bases and limited reinvestment. For battery funds, the broker was more cautious, retaining an Underperform rating on Gore Street Energy Storage due to weak ERCOT exposure and governance concerns.
Revised price targets include: 3i Infrastructure 450p (unchanged), HICL 155p (unchanged), Greencoat UK Wind 130p (from 145p), Bluefield Solar 85p (from 95p), and NextEnergy Solar 65p (from 75p). Despite deep discounts, RBC said only modest upside is likely until more credible M&A or dividend resets materialise.