Earning an attractive yield while building the renewables sector

From investors looking for an attractive yield, to those looking to contribute to reducing the global carbon footprint, Revego’s upcoming listing is exciting news.

 

There is a lot of jargon in the market when it comes investing in the renewables sector. In this episode, we cut through the jargon and highlight the key things investors should look at when considering an investment in a yieldco such as Revego Africa Investments Energy Limited, which makes its debut on the JSE this year.

Our panel is made up of:

·       Jarrett Geldenhuys, head of South African Equity Capital Markets, Investec Bank

·       Marnus Terblanche, corporate finance, Investec Bank

·       Ziyaad Sarang, chief financial officer, Revego Fund Managers

·       Chris Yelland, managing director EE Business Intelligence (moderator)

The panel also compares investing in yieldcos when compared with other similar investments.

Sarang explains that a yield company (or yieldco as it is known in the market), looks to invest in operating assets that produce predictable cash flows, primarily from long-term contracts. Yieldcos are popular in the renewables space and this has been where much of the growth in the sector has come from.

“In Revego’s case we are looking specifically at the renewable energy space in sub-Saharan Africa,” says Sarang. “These are projects where there are long-term power purchase agreements (PPAs) with large utilities. They produce very stable and predictable cash flows, which are then translated into dividends and distributions paid out to investors.”

Within the investment environment, yieldcos fit in between bonds and real estate investment trusts (REITs), which also provide investors with an income earning investment, Sarang explains.

Terblanche says yieldcos thus provide investors with access to an exciting asset class which ordinarily would not be available to them to invest in. “In addition to the  steady, predictable income benefits delivered from these underlying energy plants and infrastructure assets, the environmental social and governance (ESG) benefits are also attractive to a growing number of investors,” he says. “So having an entry point into those ESG companies is something that should be of interest as well.”

Furthermore, yieldcos provide a fairly good level of inflation and interest rate protection, based on the way that the underlying contracts with governments or users of electricity are negotiated, Terblanche adds.

Geldenhuys says that the initial dividend yield Revego is targeting is between 9% and 10%, which compares well with other investments on the JSE. “By way of example, the exchange traded fund (ETF), the Satrix Divi, is yielding about 4.5% at the moment,” he says.

Other sectors or individual investments may offer higher yields (for instance the property sector) but Geldenhuys explains that this needs to be seen in the context of the risk profile of these investments.

“We’ve seen significant restrictions and cancellations of dividends over the last year and where you are seeing yields on screens, those aren’t actually paid often, and often are deferred for at least a period of six to 12 months,” he points out.

Looking at government bonds, Geldenhuys says 10-year bonds are currently yielding about 8.5% while 20-year bonds offer about 11%. This compares with the Revego portfolio’s internal rate of return of about 11% as well. “With the other benefits, such as ESG, we certainly feel that that is well within the framework of what institutions and retail investors are looking for,” he says.

Geldenhuys expects to see much of the initial interest in Revego coming from multi-asset class funds, pension funds and balanced funds seeking income protection, with private investors coming in post-IPO.

Sarang highlights that ESG is likely to increase as an investment theme. “The spotlight has really fallen on ESG investments in recent times,” he says. “Larger investors are inclined to take their capital away from companies with a low ESG rating, leading to an increase in ESG investment products being offered, from active funds to ETFs.  In South Africa specifically we have the FTSE JSE Responsible Investment Indices, for which Revego would be eligible once it’s listed on the JSE.”

Terblanche agrees: “Interest is certainly picking up in South Africa, following the trend offshore.  From a JSE perspective, there’s definitely a focus on providing opportunities to investors who would like to participate in the investment case of companies that are doing good for the environment and the community.”

He says the indications are that Revego will be highly rated according to the responsible investment indices criteria. 

“We think it will be a good story for the South African investor who’s looking to get into ESG-type investing,” he concludes.

 

The views expressed in this podcast or not necessarily those of Revego Africa Energy Fund or a Revego Africa Energy Limited and do not constitute financial or other advice. Revego Fund Managers (Pty) Ltd. is an authorised financial service provider (FSP number 47561).

 

The views expressed are those of the contributors at the time of publication and do not represent the views of the company. These views do not constitute a recommendation or advice and should not be treated as such. Investment Bank South Africa, a division of Investec Bank Limited. Reg. No. 1969/004763/06. A member of the Investec group of companies.