Gaia infrastructure: taking a risk on the elements
Activist outfit Mergence may be the catalyst to unlock investor bounty at one of SA’s few listed green energy players
Mergence Investment Managers, a relatively small player in the local asset management industry, continues to build a reputation for fearless forays into what might be seen as deep-value traps.
Last week Mergence — which has about R33bn in assets under management — emerged as an 11.8% shareholder in Gaia Infrastructure Capital, an investment company that backs renewable energy projects and infrastructure development.
Gaia listed in November 2015 at R10 a share. But its shares have gone steadily down, hitting a low of R4.50 last month before rebounding to their present level of R5.15.
Mergence was reluctant to say too much about plans for Gaia at this stage. But joint MD Brad Preston believes Gaia holds good-quality renewable energy assets that are performing well.
"The current share price is deeply discounting the value of these assets," he says. "We are in discussions with the board and other shareholders on how we can work constructively with the company and shareholders towards realising value for all equity holders of Gaia."
Significantly, a little over a week after the Mergence shareholding was disclosed, a handful of directors — Botha Schabort, Leon de Wit, Clive Ferreira and chief investment officer Matthys Nieuwoudt — resigned from the board with immediate effect. All four were founding partners of Gaia, which was started in 2012.
The big concern at Gaia is that the share price discounts the last stated tangible NAV of R10.45 a share by over 50%.
Gaia’s main store of value resides in its minority stakes in various infrastructure projects. These include the Noblesfontein Wind Farm (20%), the Dorper Wind Farm (9.9%), Letsatsi Solar PV Farm (5.3%), Lesedi Solar PV Farm (5.3%) and the Jasper Solar PV Farm (4%).
Officially, the company’s investment mandate is to invest in diversified large-scale operational or near-operational energy, transport, water and sanitation infrastructure assets with low-risk, uncorrelated inflation-linked cash flows.
Gaia has proved a fairly reliable dividend payer. The latest interim payout of 25c a share was well ahead of the reported earnings of 18c a share. One potential hitch is that the generous dividend policy has meant Gaia has been unable to squirrel away capital for investing in new projects. At the end of the interim period the cash on hand was around R10m. With the share price trading at half of intrinsic NAV it hardly seems prudent to pursue a rights offer.
The biggest investor in Gaia is the Government Employees Pension Fund, with a 41.35% stake. Whether Mergence will be given leeway to unlock or build value at Gaia should become clearer from new board appointments.
Perhaps the first step could come from a change to the management company agreement with Gaia Infrastructure Partners (GIP) – especially now that the directors linked to the management company have resigned. The arrangement attracts a management fee that is calculated at 0.8% of the enterprise value, and paid to GIP in quarterly instalments.
Mergence itself may be an asset manager to watch in 2020.
Its tilt at Gaia follows its impasse-breaking intervention at investment company Brait, which now has the financial backing of top-rated investment company Ethos, as part of a proposed R5.56bn rights issue.
Mergence has also recently emerged as a key influencer at technology conglomerate Datatec and health-care group Ascendis.