Listed investment company GCP Infrastructure’s half year results to 30 March may not look particularly flattering when compared to its prior year’s interim results but given the market conditions there is still plenty of upside for this £1 billion trust.
The board took the difficult decision to reduce the dividend from 7.6p per share to 7p although Phil Kent, lead advisor at Gravis, which runs the trust, told Fundeye: “We set the dividend to provide investors with stability going forward.”
Given the amount of companies either cancelling their dividends or postponing distributions, a 6 percent dividend yield is still a healthy level of income in what is now a very difficult market.
Discussing market conditions, Mr Kent said that GCP Infrastructure is ‘pretty defensive’ in the COVID environment.
“We’re focused on availability-based cash flows, projects that continue to receive income regardless of whether the underlying asset is being used or not. This puts us in a strong position,” said Mr Kent.
Some of these assets include schools, which have been closed during the pandemic, although local authorities will continue to pay for them.
Not all of the portfolio is insulated from COVID related issues, it has impacted the funds biomass and construction assets for instance. However, Mr Kent said the real issue is how long a lockdown remains in place, as a three to six month hold up for an asset with a 25 year lifespan is not a major issue.
However, lower electricity prices did weigh on net asset value, net assets fell to £965.7 million down from £987.1m on a year-on-year basis and profit nearly halved to £17.2 million.
This again is COVID-related, as demand has dropped off during the pandemic and not concerning the controversial energy price predictions that a note by JP Cazenove referred to earlier this year.
Regarding those predictions, Mr Kent said: “If electric prices go the way of the Bloomberg forecasts, it becomes uneconomical for us to operate. At those prices, wind power doesn’t even pay its operational costs. People aren’t going to build projects and lose money.”
He added that those forecasts missed out the ‘feedback loop’ that if prices come down to the level suggested people are not going to build assets.
Furthermore, if certain environmental targets are to be hit, there needs to be more use of electricity to power cars and heat homes for example. If there is greater demand, this should support prices in the future.
Going forward, this crisis might present opportunities for the trust. Before COVID hit, the UK government was planning to invest heavily in infrastructure. However, given the level of spending needed to shore up the economy (not just in the UK), it seems unlikely the government will be able to fund projects itself. This suggests that will require more private capital which puts GCP Infrastructure in a strong position.
Regarding the fund’s pipeline, which stands at around £50 million, Mr Kent said there is more competition as there are similar trusts on the market targeting assets. However, GCP Infrastructure is celebrating its tenth year since IPO and will continue to look for new sectors ‘before other investors plough and there’s more competition’.
A quick glance at the shareholder register of the fund reveals that it’s a favourite of many well-known wealth managers, with the likes of Close Brothers, Heartwood and Sanlam all in the top ten. The trust may have had a punishing six months but looks well positioned for the future once there is more clarity.