The idea of getting something for nothing should appeal to every investor. In fact, for many, it is the sole reason they became stock pickers – to sift through detritus to discover diamonds in the rough.
Eminent financial analyst (and Warren Buffett mentor) Benjamin Graham provided a framework for the process – and he called it value investing.
Of course, timing is everything. And for the bargain hunters following the Foresight Solar Fund, the time for action seemed to be mid-October when the share price fell to a low of 84p.
Shortly after that, Foresight updated the market to say its solar generation and battery investments were worth 118.1p a share, based on its third-quarter net asset value calculation.
For the bargain hunters following the Foresight Solar Fund, the time for action seemed to be mid-October when the share price fell to a low of 84p. Since then, the stock has gone up – to around 100p a share.
So, in Graham’s lexicon those who swooped to buy spotted a disconnect between the market value and intrinsic worth of the business. In laypersons’ terms, they are potentially getting 34p-worth of upside for nothing – maybe even more.
Since then, the stock has gone up – to around 100p a share. So, the share price’s discount to its net asset value (NAV) has narrowed. That said, funds of Foresight Solar’s ilk have, during the market’s up-cycle, routinely changed hands at premia to NAV. So, we are probably still in Graham’s ‘value’ territory.
Now, there are other compelling reasons divorced from the bargain/value argument to add Foresight Solar to your stocks ‘watch list’.
As interest rates subside, so the yield characteristics of Foresight begin to make it look tastier. The dividend payout for the year just gone is expected to be 7.55p (with the final quarterly instalment yet to be paid).
At just over 100p a share, calculating the annual ‘coupon’ is simple. The fund has been explicit in having a progressive dividend policy, though it has been a little more circumspect on just how much it plans to distribute over the next few years.
Foresight Solar investment manager, Ross Driver, says the focus of the business is on total returns for shareholders. So, that’s a healthy dividend cheque every quarter, coupled with an increase in the share price/underlying value of the business.
In considering this aim, it is worth looking first at the make-up and strategy of the fund. The website tells us Foresight Solar invests in ground-based solar projects, mainly in the UK, but also in Spain and Australia. Altogether, its assets generate enough electricity to power 226,200 homes.
It is also allowed to plough 10% of its gross asset value (GAV) into utility-scale battery storage – a key component of the renewable energy revolution.
Now, there are several nuances to this strategy designed to help underline (and underpin) the value of Foresight Solar.
The first is slightly counter-intuitive in that it has made well-chosen asset disposals – at a premium to the book value of said assets. This helped demonstrate to a formerly unresponsive equity market the value of its investments.
Initially, the funds were used to pare down debt as the UK interest rates hit highs not seen in more than 15 years.
However, it has also freed up cash for reinvestment. This in turn has allowed Foresight Solar to start using its internal expertise to take on the development risk of certain projects – getting them oven-ready before selling them on or building them out.
As Driver told Proactive: “We made a gain on those projects that we sold just by bringing them through to operation.
“So, ongoing, the idea would be to bring projects through, sell a number of them and then, instead of paying down the debt…we’ll be recycling that back into new projects to bring through the higher yield.”
The fund is also buying back its own shares. Traditionally, buybacks are taken well by the market – usually because they are a tax-efficient method of returning cash to investors. They also help lift earnings per share.
It is also a means of investing in (its own) undervalued solar assets – though as the discount to NAV narrows the rationale for stock repurchases disappears. Driver, when we spoke to him, said: “I don’t think we’re there yet. But as you’ll appreciate, there will come a time when we have to start looking at it [the buyback programme].”
Returning to our theme: Graham’s idea of value was summed succinctly in his seminal tome, the Intelligent Investor, as to “buy cheap and sell dear”. And with Foresight Solar, there is still the capacity to do just that with stock trading at an 18% discount to the last updated NAV. But as we’ve seen above, the fund will also appeal to income investors looking for capital appreciation based on the long-term fundamentals of the renewable energy market.
To read more small-cap news click here www.proactiveinvestors.co.uk
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