Q2 2023 NAV, Trading and Capital Recycling Update
9 August 2023
Foresight Solar Fund Limited
(the "Company", "Foresight Solar" or "FSFL")
Q2 2023 Net Asset Value, Trading and Capital Recycling Update
Foresight Solar, a sustainability-focused fund investing in solar and battery storage assets in the UK and internationally, announces that its unaudited net asset value (NAV) was £726.6 million as at 30 June 2023 (31 March 2023: £757.5 million). This results in a NAV per Ordinary Share of 119.9 pence (31 March 2023: 124.2 pence per share).
Highlights:
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Strong operational performance in the first six months of the year, with electricity production 2.8% above budget, led to cash receipts from subsidiaries of £52.3 million, 42% higher than in H1 2022. Robust levels of contracted revenue support a dividend cover of at least 1.5x for the next three years. |
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Power price hedges, higher-than-expected inflation and reduced windfall tax payments offset downward effects of lower near-term power price forecasts and foreign exchange movements. |
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A 50bps increase in the discount rate for UK solar projects was the main driver of the Q2 NAV reduction. |
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Foresight Solar continues to monitor its discount to NAV and is doubling its allocation of available cash reserves to the share buyback programme to a total of £20 million. |
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The Company has identified around 200MWp of assets from its operational portfolio for a phased divestment programme starting this year. The proceeds will be used to reduce gearing and fund FSFL's current expected pipeline until the end of 2025. |
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Post-period, Foresight Solar pushed out refinancing risk by agreeing a one-year extension of its revolving credit facility under the existing terms. |
Summary of NAV key drivers for Q2 2023:
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Item |
p/share movement |
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NAV on 31 March 2023 |
124.2 |
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Discount rates |
-3.2 |
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Inflation |
1.4 |
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Power price forecasts |
-1.4 |
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Reduction in Electricity Generator Levy |
0.9 |
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Project actuals |
-0.5 |
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Foreign exchange |
-0.6 |
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Share buyback programme |
0.1 |
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Other movements |
-1.0 |
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NAV on 30 June 2023 |
119.9 |
Persistently high inflation has led central banks around the world to continue to hike base rates, with the Bank of England recently raising its benchmark to 5.25%. In response to the corresponding increase in the risk-free rate, Foresight Solar has taken its UK levered solar discount rate to 7.5% from 7% (A total increase in UK discount rates of 150bps since Q3 2022). Discount rates in other geographies remained unchanged, prudently aligned with relevant government bond yields in those countries. The weighted average discount rate for the portfolio is now 7.55% (31 March 2023: 7.16%) - this increase represents the largest downward adjustment to the Q2 NAV, with a negative impact of 3.2 pence per share.
The Company regularly benchmarks valuations against market transactions and demand for UK subsidy-backed renewable assets remains high with private market deals continuing to close at prices indicating compressed risk premia.
FSFL's inflation assumptions have proven conservative, so incorporating actual figures for the period added 1.4 pence per share to the NAV. In the UK, inflation has remained high, but, with most forecasts predicting it will fall in the second half of the year, the Company is leaving its assumption for RPI inflation unchanged at 6.5% for 2023. Assumptions for the periods between 2024 and 2030 and from 2031 onward also remained the same at 3% and 2.25%, respectively.
During the second quarter, near-term power price estimates continued to trend down from their 2022 highs. The latest blended curves for the UK forecast a fall in prices between 2023 and 2026, before converging with Q1 outlooks. Foresight Solar has prudently hedged its production for those years, minimising the downside impact to 1.4 pence per share. This fall in near-term power prices also means a reduction in forecast tax payments under the UK government's Electricity Generator Levy (EGL), leading to a positive effect of 0.9 pence per share on the NAV.
By the end of June, Foresight Solar had repurchased more than four million shares through its £10 million buyback programme, delivering 0.1 pence per share of NAV accretion.
Other movements, which resulted in a total negative impact of 1 pence per share on the NAV, include the usual effects of dividend payments, fund costs and time value of money, along with a modest adjustment to fund-level working capital.
Trading update
Electricity generated by the global portfolio was 2.8% above budget for the six months to June, predominantly driven by higher-than-expected irradiation in the UK (6.2%) and Australia (6.8%). Consequently, production in those geographies was 4.3% and 3% above forecast, respectively. The Spanish portfolio was adversely impacted by heavy rains and record-high temperatures, depressing generation 2.2% below expectation.
Strong technical performance across the portfolio helped offset the impact of unpredictable weather conditions, highlighting the benefits of Foresight Solar's geographical diversification strategy. With projects in Australia and Spain fully operational and cash-generative, the Company is in a good position to meet its short and medium-term targets.
Capital allocation
With this latest update incorporating additional prudence, the Board and the Investment Manager believe there remains a wide disconnect between the share price and the underlying portfolio value. The Directors have thus elected to allocate a further £10 million to Foresight Solar's ongoing share buyback programme, doubling its total to £20 million and aiming to deliver additional NAV accretion.
During the second quarter, the Company also concluded its review of the global portfolio and identified preferred opportunities to realise value and recycle capital whilst maintaining an attractively balanced asset base. As a result, the Investment Manager is proceeding with the phased divestment of around 200MWp from the Company's operational assets, expected to commence this year and continue into 2024.
Proceeds from transactions will be used to repay the revolving credit facility and the share buyback programme will stay under review. The Company will continue to invest in its existing pipeline of opportunities with a focus on investments that are strongly return-accretive. Based on present forecasts, completion of the divestment programme will allow Foresight Solar to fully fund its current expected pipeline until the end of 2025.
Regarding its existing pipeline, the Company will move ahead with the construction of its 50MW Lunanhead battery storage project with two-hour duration, which is better suited to take advantage of emerging market conditions and dynamics to generate improved revenues. FSFL also intends to progress its 50MW Clayfords project on a two-hour basis in due course.
Revenue and cash generation
The Investment Manager continues to forward-fix electricity sales at attractive rates under power purchase agreements and build on the proportion of contracted revenue. In the UK, which accounted for 84% of revenue, price fixes averaged £197/MWh in the first half of the year - compared to the average N2EX Day Ahead price of £108/MWh during the same period. Overall, in the first semester, cash receipts from subsidiaries totalled £52.3 million, 42% higher than in the same period of 2022.
The proportion of contracted revenue for the global portfolio now stands at 90% for 2023, 85% for 2024 and 75% for 2025. This active hedging strategy has substantially insulated Foresight Solar from the fall in near-term merchant power prices. The revenue stability and solid cash distribution also provides confidence in the targeted 1.5x dividend cover for the next three years.
Gearing
In August, the Company secured a one-year extension to its sustainability-linked revolving credit facility, limiting refinancing risk until the new maturity date of February 2026. The pricing structure remains unchanged: interest charged is linked to ESG performance, with margins ranging from 185bps to 195bps over SONIA.
Electing to use the proceeds from asset sales for future capital needs instead, FSFL has not needed to exercise the option to implement the £30 million accordion facility.
The Gross Asset Value (GAV), including Company and subsidiaries, on 30 June 2023 was £1,237.2 million (31 March 2023: £1,268.2 million). The Company's total outstanding debt was £510.6 million, representing 41.3% of GAV (31 March 2023: 40.2%), comfortably within the 50% limit.
Interim results date
Foresight Solar will publish its interim results for the six months to 30 June 2023 on 14 September 2023. A further Notice of Results announcement will be released in due course.
For further information, please contact:
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Foresight Group |
+44 (0)20 3911 2318 |
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Matheus Fierro |
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(fsflir@foresightgroup.eu) |
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Jefferies International Limited |
+44 (0)20 7029 8000 |
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Gaudi Le Roux |
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William Brown |
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Harry Randall |
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Singer Capital Markets |
+44 (0)20 7496 3000 |
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Robert Peel |
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Alaina Wong |
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Citigate Dewe Rogerson |
+44 (0)20 7638 9571 |
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Toby Moore |
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Lucy Gibbs |
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