Foresight Solar Fund (FSFL)   93.5p

Market cap: £533 million

Over 2023, infrastructure funds were among the worst performers in the investment trust universe as higher rates made assets like bonds and cash relatively more attractive. Caught up in the wider renewable infrastructure trusts de-rating was the Foresight Solar Fund (FSFL), a sustainability-focused vehicle invested in solar and battery storage assets in the UK and overseas.

Shares believes the turn in the rate cycle will bring a brighter future for the sector as gilt yields come down, leaving the high yields on offer looking more attractive to income-hungry investors.

Well positioned to capitalise on this shift, Foresight Solar’s shares have scope to re-rate from an 18.2% discount to NAV (net asset value) as debt falls and the FTSE 250 firm sells non-core assets at attractive prices. Based on its full year 2024 target dividend of 8p, Foresight Solar offers a bumper 8.6% yield and a share buyback programme of up to £50 million, supported by the robust cash flows generated from a highly contracted revenue base, should limit the downside from here.

SUNNIER OUTLOOK

Foresight Solar is invested in and manages approximately 1GW (gigawatt) of renewable energy infrastructure in the UK and internationally. Steered by Foresight Group’s Ross Driver, the fund’s objective is to provide investors with a sustainable, progressive quarterly dividend and capital growth through investment in a portfolio of ground-based solar farms and battery storage systems, predominantly located in the UK.

The core of the portfolio is represented by ROC (Renewable Obligation Certificate) subsidised operational UK solar PV projects, alongside UK battery storage assets, Australian solar PV and Spanish solar PV assets. The company argues its UK sites consistently outperform peers in converting solar irradiation into electricity thanks to its dedicated team’s consistent application of advanced techniques.

‘We’ve got a strong portfolio here in the UK, which is where we are centred,’ explains Driver. ‘But we’ve also got our investments in Spain and Australia, so there is that international diversification to the fund. When the sun doesn’t shine over here, we should have some balance and diversification through those other markets.’

PORTFOLIO POWER

‘We’ve got the biggest share buyback programme in the sector relative to the size of the fund, we’ve increased that to £50 million,’ adds Driver, who believes that the renewables sector as a whole will benefit from a re-rating ‘once we start to see some more certainty in rate cuts coming through and now that power prices are settling down’.

Merely generating income isn’t enough in the current environment, so Foresight Solar Fund is now pursuing a refreshed strategy with a greater emphasis on total returns, specifically boosting returns through development and construction activities and with non-core portfolio assets being earmarked for sale. ‘Our yield is about 9%, but we also want to deliver a further 1% to 2% in capital growth and we are driving that through the development pipeline we are looking at,’ enthuses Driver.

In a second quarter update (8 August), Foresight Solar published an NAV of 114.9p per share, a small 0.2p increase over the quarter as near and long-term power price forecasts in the UK trended up, although this impact was largely offset by below-budget irradiation and generation due to unplanned network outages and a small number of inverter issues.

Foresight Solar’s assets in Spain and Australia continued to perform poorly, again given poor weather and network outages, and overall production for the whole global portfolio was 7.1% below budget.

Yet despite this below-budget generation in the period, cash flow remained resilient, primarily due to Foresight Solar’s power price hedging strategy. Visibility is high too, with the proportion of contracted revenue for Foresight Solar’s global portfolio being 89% for 2024, 83% for 2025 and 63% for 2026.

At 65% of NAV, Stifel observes that Foresight Solar’s net leverage is a bit lower than some peers, although it ‘remains too high in our view given the costs of debt and volatility in power prices’. However, the trust will update the market on its disposal programme at the forthcoming first-half results (18 September), which may provide further clarity on debt reduction and share buybacks, while ongoing charges of 1.15% are reasonable for a specialist renewable energy trust.

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