How to invest in the changing energy market

October 26, 2013 by  
Filed under Solar Energy Tips

However, EDF’s shares have risen by 85pc this year, making some share analysts
doubt the prospects for further improvement. UBS has a “neutral”
rating on the shares and thinks they are worth €20.50, well below the
current market price of about €25.50.

SP Capital IQ recently advised investors to sell the shares, valuing them
at €22. It said it expected EDF to invest £3.5bn in building the new plant
at Hinkley Point in Somerset and then sell about half its stake in the
project. It predicted a 10pc return on EDF’s investment but added: “Construction
cost overruns will be borne by EDF and any savings must be shared with

Another French utility with a nuclear energy arm is GDF-Suez, which runs
atomic stations in Belgium. Its shares have also risen sharply in recent
months and SP now rates them a hold.

Companies in the nuclear supply chain

Sometimes the best opportunities are on the fringes of a growth market,
especially if you look at smaller companies, which get less attention from
investors and analysts.

Many subcontractors can expect to gain work thanks to the Hinkley Point
project. One is Aveva, which provides engineering software. The company says
its software has been “continuously developed to meet the evolving
specific needs of power plant design”.

Analysts at Panmure Gordon, the stockbroker, identified the shares some time
ago as standing to benefit from increased investment in nuclear projects. It
rated the shares a hold with a £23.74 target price – which has since been
exceeded, with shares now trading at around £26. Potential buyers might be
put off by the company’s valuation of about 30 times its annual profits.

Carr’s Milling is a small, diversified British company whose engineering arm
makes remote handling equipment for the nuclear and petrochemical industries.

Analysts at Shore Capital Stockbrokers said demand for these products meant
sales were rising strongly. Investec has a price target of £17.10 on the
shares, which have also risen strongly this year to trade at about £17 this
week. The company also makes animal feeds and runs flour mills.

Augean is a British company that handles low-level nuclear waste, which it
buries in special landfill sites. It’s hard to get planning permission for
such sites so competitors will find it difficult to break into the market.
The business is much more profitable than normal waste handling, said James
Smith, manager of the Premier Energy Water Trust. “It doesn’t
have much debt and has just paid its first dividend,” he said. “It’s
a unique company and its shares are reasonably valued. We increased our
holding by 50pc following the results earlier this month.”

If you want to invest in uranium mining BHP Billiton has a site in South
Australia, although it is not one of the company’s major business units.

‘Green’ energy companies

There are relatively few quoted companies that specialise in “green”
energy, but one is Renewable Energy Generation, an Aim-listed firm that Mr
Smith holds in his fund. It develops small wind farms, some of which it
sells to raise funds to build more sites. “It has been rather hit and
miss financially but there are signs of improvement,” he said. “It
has a lot of sites going through the planning process at the moment.”

Shares in a much larger green power company could be available to investors
soon. Infinis, which owns 147 generating plants and says it has a 7.3pc
share of the renewable power market, plans to offer at least 30pc of its
shares on the London Stock Exchange next month. It operates power stations
that burn gas produced by landfill sites as well as onshore wind farms and
hydroelectric plants.


Coal prices have suffered from the “gas boom”, said Jack Allardyce
and Troy O’Dwyer, mining analysts at Panmure Gordon. As a result,
infrastructure companies such as Aurizon, the Queensland railfreight
operator, may offer more promise, they said. Coal producers on the London
market include Glencore Xstrata, Rio Tinto and Anglo American.

Energy funds

There are numerous funds with exposure to different parts of the energy
sector. They range from large, mainstream funds that currently have large
energy holdings to smaller, more specialist rivals and tax-efficient but
riskier investment trusts.

“The fund with momentum right now is Guinness Global Energy, which has
gained 19pc over the last 12 months,” said Brian Dennehy of,
an online investment shop. This fund has 63pc of its money in American
companies, although the top 10 holdings include Shell and Total as well as
ConocoPhillips and Marathon Oil. “This fund is a play on the oil price,”
Mr Dennehy said.

It is co-managed by Tim Guinness, who also runs the Guinness Alternative
Energy fund. Mr Guinness is a “quality specialist manager”, said
Jason Hollands of Bestinvest, the fund shop.

Mr Hollands said his company was cautious about commodities at the moment and
did not rate any energy funds a buy. But he added: “I do hold the
Artemis Global Energy fund myself. The managers, John Dodd and Richard Hulf,
a former oil analyst and ex-oil company executive, have a huge amount of
experience in this area.”

Another option is Pictet’s Clean Energy fund; its definition includes nuclear

Very different are the investment trusts that specialise in renewable energy,
several of which have been launched recently. Bestinvest has Bluefield Solar
Income, Greencoat UK Wind and Renewables Infrastructure Group on its buy
list, although all now trade at a “premium”. This means that you
pay more for the investment trust shares than you would for the underlying
investments if you could buy them separately.

“The attractions of these are that they offer high dividend yields –
typically with a policy to raise them in line with inflation – and that a
proportion of their revenues are in effect guaranteed by subsidies,” Mr
Hollands said.

A specialised type of investment trust called a “venture capital trust”
or VCT offers an additional benefit in the form of a 30pc tax refund, paid
to you at the outset, although you must hold the shares for at least five
years. Dividends and capital gains are also tax-free.

It is possible to subscribe for shares in a new VCT called Foresight Solar,
which intends to sell its assets and wind up between five and six years
after the offer closes. Ben Yearsley of Charles Stanley Direct, another fund
shop, said: “Foresight is a very well positioned VCT group. Once a
solar plant is up and running it effectively generates inflation-linked
income that is tax-free in a VCT.”

However, energy funds – even at the more mainstream end – are not for
everyone. Philippa Gee, a financial adviser, said: “I would not advise
the average investor to consider one of these very specific funds. While
there are undoubted opportunities, you may need to hold on to them for
longer, and they may be more volatile in the meantime.”

The FTSE 100 energy giants

Centrica and SSE, listed in London, pay dividends of 4.6pc and 5.8pc
respectively, net of basic-rate tax. However, when fund managers at Miton
put utilities’ books under the microscope they found that only Centrica’s
dividend was properly supported by the cash generated by the business.

But the managers, George Godber and Georgina Hamilton of the Miton UK Value
Opportunities fund, sold their Centrica shares after Ed Miliband, the Labour
leader, said he would cap energy prices if he won the next election.

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