Results analysis from Kepler Trust Intelligence

Foresight Sustain. Forestry Co PLC
14 June 2023
 

Foresight Sustainable Forestry (FSF)

14/06/2023

Results analysis from Kepler Trust Intelligence

·    Foresight Sustainable Forestry (FSF) has reported its results for the six months ending 31/03/2023. Despite numerous macroeconomic headwinds, the trust proved resilient, with its net asset value (NAV) increasing from £180.6m to 186.6m. The trust's shares also rose by 1.9% over the period.

·    The increase in NAV was mainly driven by revaluations of the trust's afforestation sites - plots of land that are converted into forestry. Completion of planting at four sites that had been acquired by the trust was a key driver of returns. This provides validation of the argument managers Robert Guest and Richard Kelly of Foresight Group have made since IPO in November 2021, namely that converting plots of land into forestry should prove accretive to NAV.

·    In December, FSF also became the first investment company to receive the Voluntary Carbon Market designation from the London Stock Exchange. The VCM accreditation shows that FSF's carbon credits are subject to high quality oversight and verification. FSF's Board plan to allow shareholders the choice to either receive carbon credits from 2030 onwards as in specie dividends to offset their unavoidable emissions, or to receive an equivalent dividend in cash.

·    FSF Chair Richard Davidson said: "The long-term demand outlook for sustainable timber in both the UK and Europe remains positive and underpinned by the prevailing decarbonisation agenda. As we embark on the next six months, [FSF] is well positioned to leverage a range of environmental tailwinds whilst it continues to deliver on its business objectives."

Kepler View

Foresight Sustainable Forestry (FSF) is the only investment trust listed today that provides investors with exposure to the UK's natural capital and sustainable forestry sector. The Investment Manager, Foresight Group LLP, drives returns by investing in afforestation projects. This takes relatively lower grade agricultural land and transforms it into more valuable forestry once fully planted and the trees are established. Returns are also generated by investing in and upgrading existing forestry sites, with the intention of harvesting and selling the timber they produce, and by tapping into the nascent market for carbon credits, which afforestation sites generate.

FSF only launched in November 2021 but these latest half-year performance figures are positive and build on prior results that suggest the trust's strategy is working. The Company has delivered a total NAV per Ordinary Share return of 10.6% since IPO and increased its NAV to £186.6 million (30/09/2022: £180.6 million) during the period. As noted, a key driver of returns has been the upward revaluation of land that has been converted into forestry. So far, these revaluations have been stark. For example, one FSF site - Mountmill Burn in Scotland - saw a 97% uplift to its acquisition value when planting was complete.

That uplifts to NAV continued in the most recent half-year period whilst timber prices were relatively muted also illustrates the resilience of UK forestry assets to interest rate hikes. Acquisitions in the sector are not typically reliant on large amounts of debt, meaning rate hikes are less impactful than on other property investments. FSF has also traded with lower volatility and at a premium to NAV for several prolonged periods. We think this illustrates the trust is relatively resilient to wider macroeconomic headwinds, such as inflation, as well as offering strong portfolio diversification benefits, given its low correlation to other asset classes, like bonds and equities.

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