Oscar Wilde famously said that a cynic is "a man who knows the price of everything and the value of nothing".
Retail investors that continue to shun the renewable energy investment trust sector could be in danger of allowing themselves to fall into such cynicism with current share prices blinding them to the inherent value of the sector’s underlying portfolios.
We think it is logical for investors to question why a company share price is low, as often this represents the only lens through which to understand the market value of the business.
However, it is also true that volatile stock prices can often present a false impression of a business’ real value. In fact, investment strategies, such as value investing, are based on an understanding that the market often fails to realise true value.
Current moribund share prices, however, do not reflect the mounting evidence that renewable energy investment trust portfolios are undervalued and mean the sector could be one of the most under-appreciated pockets of value in the UK equity market as the investment case remains the same.
Proving the value
There are two ways to measure the value of these trusts. One is the share price, which is what someone is willing to pay for one share in the company.
The other is to value the underlying portfolio of renewable assets, which is done by establishing what the market is likely to pay for each of the projects in aggregate, known as the net asset value (NAV).
When the total market capitalisation, or the total equity/share value of the investment trust, falls below the value of its underlying assets, the investment trust is said to be selling at a discount to NAV.
For some time, most renewable energy investment trusts have been trading at a discount to NAV, with some discounts to NAV as much as 40 per cent.
To put this into context, five years ago renewable energy trusts were trading on an average premium of 8.9 per cent, versus a long-term average premium of 4.4 per cent.
These deep discounts today have led to many questioning the viability of the sector, including whether the trusts are accurately valuing the assets in their portfolios. However, evidence is mounting that these valuations are indeed correct.
A recent research paper by Barclays showed that renewable energy infrastructure investment trusts had executed a dozen asset sales since the start of 2023, for around £500mn.
All these deals were priced at or above their valuations seen in the NAV of these trusts.
Why should this matter?
It should give investors a level of comfort on the true value of what they are buying, which is at a discount today, and a measure of downside protection when they invest in these trusts.
