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Investment Trust Newsletter

Extract taken from:

07th July 2017 - Investment Trust Newsletter

Bluefield Solar Income Fund Limited (BSIF, 115p)

It may not take too much detective work to figure out that Bluefield Solar Income Fund aims to generate income from solar photovoltaic energy assets, based in the UK, but there is one widespread misapprehension that it is best to quash straight away. The trust does not rely on those rare days of perfect British sunshine to deliver bright returns. James Armstrong, the managing partner at Bluefield Partners, explained that actually, levels of irradiation have low volatility in the UK and are very predictable. The returns are not weather-related.

That was a recurring theme in our discussion – that this £411m trust aims to be “reassuringly boring.” BSIF – London’s first specialist solarfocused fund listed in 2013 – was set up as an income investment. James says “everything we have done since listing is designed for investors to make sure they get the dividend.” In the last full year that dividend was 7.25p, implying a yield of 6.3% at the current share price. The trust operates what it calls a “full payout model” where it pays out all of its earnings to shareholders – James says “our view is that we don’t want to hold on to the cash.” There is just a small dividend reserve of about 0.25p per share.

That yield looks attractive, assuming it is solid. James says that solar is the most predictable of all new energy asset classes and points out as well that this trust offers pure UK exposure. There is no currency risk here – it is just simple sterling income. Relative to plan and to its peers, James says the trust has had “a very successful four years.” The trust has developed its portfolio of 44 solar farms across the southern half of England (with two in Wales), and now has “more than half a billion pounds of gross assets.” It has 424 megawatts of operational solar power. If you’re wondering about how much borrowing is used to fund the assets, the model is to have about two-thirds equity and one-third leverage, which does not seem excessively geared. The borrowing takes the form of a £187m long-term financing agreement with Aviva that provides BSIF with what James says is the lowest debt cost in the sector.

James likes solar because “it is so simple.” There are rows of modules in fields, and they are not complex. There are no moving parts to break, and although Bluefield has a team of 40 specialist engineers in Bristol, the equipment has a very low attrition rate. The modules have been easy to install and quick to build, which has been important for the trust that has been operating in the primary market – building the solar farms – since launch. Now that the government has drawn a line under its subsidies – no longer available from April 2017 – this means that construction in the sector has stopped and the solar market is transitioning to a secondary market, where new operators will generally buy existing assets. James  believes this puts upward pressure on prices and valuations. He points to the largest recent secondary transaction in the UK, for 360 megawatts of power at a price of £1.3m per MW. That compares to Bluefield’s average price paid of £1.16m per MW. The trust is in a sweet spot, having its assets in place, and James says “we don’t have to do anything now.” His view is that there could be some strength in the asset valuation from this point forward as some yield compression kicks in, perhaps 15p more in market valuation terms, but he is pleased he is not having to invest cash into a very competitive market. Unlike many other infrastructure trusts, BSIF is not looking to raise more money for expansion.

“We think the dividend is pretty attractive for income investors”, James says, and he adds “we have our own money in the fund.” Bluefield Partners has a stake of around £3m in the trust, and the directors have about £1.5m invested. That’s good to know, although we never consider management holdings to be absolutely crucial. James considers the trust a defensive income play where the majority of that income is regulated and directly linked to RPI. Renewable Obligation Contracts (ROCs) and Feed-in Tariffs (FITs) account for 62% of revenue, while the other 38% is sold under more flexible Power Purchase Agreements (PPAs) to the wholesale markets.

We can see that Bluefield Solar has found its spot in the sun, having built its solar farms while subsidies were available, and now owning valuable assets that might see some valuation increases as demand builds in the secondary market. The full payout model means the dividend yield looks HIGHLY ATTRACTIVE, we think, and the income stream looks well protected with Bluefield’s technical team in place to tackle any issues, plus some scope for higher power prices to be achieved in the future. There is no currency risk either, so for an asset that should provide non-correlated returns, we think this trust is a buy for income investors wanting to diversify away from equities. The trust has both a better total return record over three years and a higher yield than its peers Foresight Solar (FSFL, 111.75p) and NextEnergy Solar (NESF, 113.375p).