Ian Cowie: new trust offers chance to buy hot sector without overpaying

Our columnist runs the rule over an investment trust that is intending to IPO.

With less than a week left before Britain’s first investment trust focusing on ‘green hydrogen’ intends to float on the London Stock Exchange, investors are entitled to ask: is it all hype? Or, more positively, is this an opportunity to get into renewable energy at close to net asset value (NAV)?

Clues to the answers to both questions can be seen in the Association of Investment Companies' (AIC) ‘Renewable Energy Infrastructure’ sector, which is now home to no fewer than 18 trusts and the average share price stands 8.6% higher than NAV. Several trusts trade at double-digit premiums, such as Greencoat Renewables (LSE:GRP), which is priced 17% above its NAV; SDCL Energy Efficiency Income (LSE:SEIT), 13% above NAV; and the industrial batteries specialists Gresham House Energy Storage (LSE:GRID) and Gore Street Energy Storage (LSE:GSF), are trading on premiums of 12% and 11%.

So clean or green energy is clearly a popular sector at present. More positively for value-seekers, the initial public offer (IPO) of HydrogenOne Capital Growth (HGEN) at £1 per share entails costs that are not expected to exceed 2% of the £250 million it aims to raise. HGEN’s prospectus states: “The company has agreed with the investment adviser that the NAV per ordinary share at admission will be not less than 98 pence.” HGEN’s key information document estimates total costs in the first year of 1.49%.

All of which leaves unanswered the more fundamental question: why bother with green hydrogen? Most readers will be aware of the United Nations’ Paris Agreement intended to reduce global carbon emissions by moving away from fossil fuels, such as coal and oil, and towards cleaner forms of energy.

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Electricity has attracted most attention, not least because of the high profiles of Tesla (NASDAQ:TSLA) and its chief executive Elon Musk. But there is rising awareness that electric cars may merely transfer pollution from where we can see it - coming out of the exhaust pipes of internal combustion engines - over to where we can’t see it, in the form of environmental destruction caused by cobalt mining in the Democratic Republic of Congo and elsewhere. Making batteries can be a mucky business.

By contrast, if wind or solar-generated electricity is used to split hydrogen out of water, then there are no - or very low - carbon emissions, when the gas is produced, stored and consumed. That’s a fundamental difference from when I first invested in green hydrogen more than a decade ago.

Back then, many cynics claimed this form of energy production and storage would never be viable because the gas was worth less than the electricity required to produce it. Even so, I paid 41p per share for ITM Power (LSE:ITM) in January 2010, and sold at 56p in March 2011, for reasons now long forgotten.

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Nothing much happened to the share price for the next eight years until Linde (NYSE:LIN), the $151 billion German/American industrial gases engineer, paid £38 million for a minority stake in ITM in 2019. That convinced me the cynics might be mistaken, so I invested 2% of my life savings in ITM at 124p per share in January 2020.

Fortunately, Mr Market soon began to share my optimism and ITM ran up to 539p at which point I sold a parcel of stock worth two-thirds more than my 2020 investment in January this year. The shares now trade at 391p and the rump of my stake remains a top 10 holding by value in my forever fund.

That tale of extreme volatility and an ongoing scientific debate between cynics and enthusiasts for green hydrogen illustrates the value of the diversified exposure to this sector that HGEN can provide. This investment trust should be a lot less volatile than an individual trading company, like ITM, where all shareholders’ capital is invested in one business.

Better still, HGEN’s investment advisers - Dr John Traynor, who used to work at Royal Dutch Shell and BP; plus Richard Hulf who held senior roles at Exxon and Babcock Power - each bring more than 30 years relevant experience to stock selection.

It’s also encouraging to see the global energy giant, INEOS Energy, subscribing £25 million in this IPO in return for a seat on the board of HGEN.

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Brian Gilvary, executive chairman of INEOS Energy, said: “Our investment in HydrogenOne will help to accelerate and diversify INEOS’ existing clean hydrogen strategy. It marks the beginning of a substantial and long-term partnership.”

Similarly, Simon Hogan, HGEN’s chairman was also bullish: “The offering here is for specialist access to the growth potential in clean hydrogen energy, that is simply not available elsewhere.”

Against all that, even diversified exposure to renewable energy with professional stock selection is no guarantee of good returns. For example, the average investment trust in this AIC sector is marginally down -0.5% over the last year. However, to take the trusts mentioned earlier over the same period, GRP is up 1.7%; SEIT is nearly 13% higher; GRID is 8.5% ahead and GSF - the top performer in this AIC sector over the last year - has delivered total returns of just over 16%. Interestingly for income-seekers, these four trusts yield dividends of 5.2%, 4.8%, 5.9% and 6.3% respectively.

HGEN is unlikely to match any of those payments - as its name suggests, the new trust’s priority is capital growth - but it does offer the prospect of doing well by doing good. The minimum investment is £1,000 and the IPO closes next Tuesday, 27 July.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor. 

Ian Cowie is an investor in Gore Street Energy Storage (GSF) and ITM Power (ITM) as part of a diversified portfolio of investment trusts and other shares.