Tax Tailwinds – Investments in Listed Infrastructure & Renewable Energy
Posted on: September 28th 2022 · read
Britain’s new Prime Minister Liz Truss and her new Chancellor, Kwasi Kwarteng, have confirmed measures aimed at easing the ‘cost of living crisis’ as part of the planned fiscal event or “mini-budget” held on Friday 23 September. One of these measures is the reversal of the planned increase in UK corporate tax from 19% to 25%.
The reversal will see the government surrender a boost to corporation tax receipts (approximately £17 billion anticipated from 2025/26) and increase the nation’s debt that has ballooned in response to the Covid-19 pandemic. Despite this, Truss will hope that lower rates of corporation tax will strengthen incentives for investment across the UK, helping to drive economic growth towards a target rate of 2.5% a year.
Scrapping the planned rise in corporation tax should be beneficial for valuations across the London-listed infrastructure and renewable funds, given tax is a key component in their project cash flow modelling. Indeed, this sensitivity to changes in tax rates was demonstrated as recently as 2020, when many of the funds with significant UK exposure saw their NAV's (Net Asset Values) reduced after the planned reduction in UK Corporation Tax from 19% to 17% was reversed in Sunak’s March budget. For funds that had adjusted their valuation assumptions for higher UK corporation tax from 2023 onwards, we expect the opposite this time around and anticipate imminent uplifts to NAVs. Based on data published by the funds last year, the approximate impact on NAVs could be as high as +2.3% across the infrastructure sector and +4.1% within the renewables space.
There has also been uncertainty surrounding ‘windfall taxes’ for electricity generating companies, following the imposition of the ‘Energy Profits Levy’ which targeted UK oil and gas company profits earlier this year. The newly installed Prime Minister has dismissed additional windfall taxes, providing a further boost across renewables, which have enjoyed short-term gains from the current elevated levels of power prices. The risk of an additional tax appeared to have been ‘priced in’ by the market, with most of the funds trading on historically low premia to NAVs throughout the summer, reflecting weak investor sentiment. With that risk now having all but disappeared, the outlook for the renewable energy generators looks brighter and valuations across the sector may be reassessed.
Given the long-life nature of the projects, stable (and often growing) cashflows generated and the potential for inflation protection, we believe listed infrastructure and renewable energy investments can serve as a useful diversifier within a traditional multi-asset portfolio. Further to providing a reliable income stream for investors, these vehicles have shown resilience against a backdrop of market volatility this year and have historically exhibited low correlation with other asset classes, improving risk-adjusted returns.
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