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Renewable Energy investment trusts have experienced a sharp sell-off as a result of lower forecast power prices, but the weakness could create a buying opportunity for Bluefield Solar Income (LON:BSIF).
The growing acceptance of the importance of tackling climate change has enabled the Renewable Energy sector to expand in recent years to the extent that there are now 13 investment trusts providing exposure to everything from solar and wind to hydropower and battery storage. Most of these funds offer attractive yields in excess of five percent per annum and trade at a premium to their NAV.
Investor sentiment has deteriorated since the start of the year due to the potential impact of lower forecast energy prices on NAVs and dividends. Power prices are a key driver of returns as they affect 40% to 50% of these funds’ long-term revenues.
Wholesale energy prices were around £53 per megawatt hour in 2018, but they have since fallen to £36 with estimates suggesting a further possible decline to £25 by 2030. This is due to an anticipated increase in the supply of energy from wind and solar and a steady stream of natural gas.
The shares have sold-off
The £417m Bluefield Solar Income Fund (LON:BSIF) has been particularly badly affected with the share price falling around nine percent from its recent high. Numis believe that the sell-off looks unjustified given the quality of its earnings and its high performing and conservatively valued portfolio.
They recommend BSIF as a core buy and highlight the high covered dividend of 6.1%, which is well above the weighted average yield of 5.1% that is available from its Renewables peer group. The actual yield could even be higher as the fund has outperformed its target dividend in four of the last six years.
One of the main difficulties when looking at these sorts of alternative assets is that the valuations are a lot more problematic than with a normal equity fund. The underlying holdings are less liquid so the NAVs are not published as frequently and they are based on models and estimates as there is no actively traded market to provide up-to-date prices.
Conservative and uncomplicated balance sheet
BSIF benefits from a conservative and uncomplicated balance sheet with the low cost, fixed rate debt being amortised through a simple repayment structure. Numis believe that the greater transparency warrants a premium rating and that the fund’s high performing portfolio and well-structured balance sheet should deliver solid earnings.
If you look at the data, Bluefield appears to be trading on an eye watering premium to NAV of 17%, but Numis suggest that the conservative nature of the directors’ valuation means that the true figure is substantially lower. They say that if it were to apply similar long-term discounted cash flow assumptions to the others, the NAV would be around 125p, which is only about five percent less than the current share price of 132p.
The high yield of 6.1% is attractive to income investors and the fact that the dividend is well covered by earnings should mean that the payments are more likely to be maintained in the face of lower power prices. I think it is well worth adding to a watch list and keeping an eye on until there is more clarity about the impact of the coronavirus on global growth.