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Investment Trust Watch: two high-yield solar funds stumble

Investment Trust Watch: two high-yield solar funds stumble

Ten ‘alternative income’ investment companies dominate Numis Securities’ ‘cheap’ list (see first table below) this week but the one that captures my eye – because it is a new entrant – is NextEnergy Solar (NESF).

Shares in the £617 million renewable energy fund have slipped 3% this month – and are down more than 5% over four weeks – after surprising the market with the acquisition of eight solar parks in southern Italy.

While not a big decline it has weakened NextEnergy’s premium rating at a time when falling power price forecasts are nibbling at net asset values (NAV) in the sector.

At yesterday’s closing price of 108.3p shares in the Guernsey-based, London-listed company stood 3.4% above their estimated NAV of 104.7p per share, yielding 5.8%.  That’s down from a 12-month average premium of 8%, giving the shares a ‘cheap’ Z-score of -2.2.

Just to recap, a Z-score is a measure used by analysts to put a premium or discount on an investment trust into the context of its previous 12 months. Roughly speaking, an investment company or trust with a Z-score of -2 or below is ‘cheap’, while a score of 2 or more is viewed as ‘expensive’.

Overseas risks

The sight of NextEnergy shopping overseas was not a complete shock. Like several of the other listed renewable energy and social infrastructure funds, it had complained about the increasing high valuations of UK assets as pension funds and others piled into a sector prized for its government-backed, inflation-linked revenues.

Nevertheless, the company’s decision to use up nearly all its 15% allowance in non-UK countries with a single purchase of a 12% weighting to Italy did raise eyebrows. Analysts counted more cons than pros as they assessed the deal, including construction risk, currency risk, political risk and a lack of inflation linkage.

On the other hand it will strengthen the quarterly shareholder pay-outs, with the extra revenue forecast to improve dividend cover from 1.2 times at the end of March.

Analysts at Stifel remained ‘neutral’ saying a future share issue by NextEnergy would likely provide a cheaper buying opportunity.

Foresight falters

NextEnergy did not go as far afield as rival Foresight Solar (FSFL), which in October bought a 48.5% stake in project to build three solar parks in Australia, making it the first renewables fund to venture out of Europe.

Australia has lots of sun and a growing market but investors are not keen on the shift from the fund’s initial remit. They signalled their displeasure this week when Foresight revealed it had raised only £39 million of the £75 million it had sought in a placing of new shares.

The new shares were issued at 108p, a 2.9% discount to their price before the placing was announced. Foresight is due to pay a second quarterly dividend of 1.58p this month and aims to pay a total for the year of 6.32p, giving them a yield of 5.9%. Anybody who waited could buy the shares today at just under 106p, on a 4.6% premium to NAV and a yield of 6%. 

'Cheap' trusts Share price premium (- discount) to net asset value % 12-month average premium (- discount) % Z-score
Residential Secure Income (RESI)  -0.3 2.5 -3.8
RM Secured Direct Lending (RMDL)  1.9 4.1 -3.2
SQN Asset Finance Income C (SQNX)  -5.1 4.3 -2.9
Blackstone GSO Loan Financing £ (BGLP)  -0.7 4.0 -2.8
Fundsmith Emerging Equities (FEET)  -3.4 0.7 -2.8
John Laing Infrastructure (JLIF)  1.3 10.8 -2.7
Empiric Student Property (ESP)  -7.6 3.6 -2.7
MedicX Fund (MXF)  16.2 21.4 -2.5
SQN Asset Finance Income (SQN)  -7.1 8.7 -2.5
Hadrians Wall Secured Investments C (HWSC)  2.3 4.1 -2.5
Civitas Social Housing (CSH)  0.0 6.7 -2.5
EP Global Opportunities (EPG)  -7.6 -5.2 -2.5
Henderson High Income (HHI)  -1.7 0.6 -2.3
NextEnergy Solar (NESF)  3.4 8.0 -2.2
Invesco Perpetual Select - Balanced Risk (IVPB)  -3.5 -1.4 -2.2

Source: Numis Securities 9/11/17

Also falling into the cheap zone is SQN Asset Finance, with the discounts on both its ordinary shares (SQN) and C shares (SQNX) widening to 7% and 5% following news that it had pushed AIM-listed Snoozebox into administration.

Turning to our second table of ‘expensive’ trusts, a handful of UK trusts have enjoyed a post-Brexit re-rating in their shares. Jupiter UK Growth (JUKG), whose manager Steve Davies was not prepared for a ‘leave’ vote last year, now trades at a small premium having survived a mauling immediately after the referendum. Meanwhile, leading small-cap funds from Henderson, Aberdeen and Standard Life have seen their discounts narrow to give them Z-scores well above 2.


'Expensive' trusts Share price premium (- discount) to net asset value % 12-month average premium (- discount) % Z-score
Jupiter UK Growth (JUKG)  1.1 -2.2 4.4
Impax Environmental Markets (IEM)  -7.6 -11.4 3.7
Electra Private Equity (ELTA)  -11.9 -68.5 3.4
Alternative Liquidity (ALF)  -70.8 -79.4 3.1
Invesco Perpetual Enhanced Income (IPE)  7.9 4.3 2.8
Henderson Smaller Companies (HSL)  -11.7 -15.0 2.7
Hansa Trust (HAN)  -24.9 -30.6 2.7
Aberdeen Smaller Companies Income (ASCI)  -13.4 -20.3 2.7
Hansa Trust A (HANA)  -26.9 -31.7 2.7
Standard Life UK Smaller Cos (SLS)  -1.9 -6.0 2.6
Dolphin Capital Investors (DCI)  -66.1 -75.2 2.6
International Biotechnology (IBT)  -0.6 -7.1 2.6
GCP Asset Backed Income (GABI)  10.8 6.4 2.5
Oryx International Growth (OIG)  -14.1 -18.1 2.5
Baker Steel Resources (BSRT)  -14.5 -29.2 2.5

Source: Numis Securities 9/11/17


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