When looking at dividend yields, Foresight Solar Fund (LSE:FSFL) currently stands out among FTSE income stocks. Apart from offering one of the highest payouts in the FTSE 250, the shares are also trading at a near-25% discount to their net asset value (NAV). So is this a potential buying opportunity?
Drivers of weak sentiment
Since late 2022, the Foresight Solar share price has seemingly been stuck on a downward trajectory. There are several factors at work here, but the two most prominent are a lack of sunshine and higher interest rates.
Being a solar energy generator, Foresight’s at the mercy of the weather. And lately, it just hasn’t been cooperating, with the 2024 generation coming in 7% below budget. At the same time, higher interest rates drive up the cost of borrowing capital, resulting in tighter access to external financing options.
Neither of these structural or operational factors has been helpful in boosting investor sentiment surrounding Foresight Solar or, indeed, most UK renewable infrastructure trusts. And there’s seemingly a small minority of shareholders wanting to pack their bags, given that 24% voted for the firm to liquidate itself at the 2024 annual general meeting.
Fixing the issues
While 24% is far from enough to win the continuation vote, it’s still significant. In response, management’s outlined a new strategy to try and regain shareholder trust.
This involves a new buyback plan to take advantage of its NAV discount along with phased disposal of underperforming international assets, starting with those in Australia. Management also agreed to explore the possibility of a merger or consolidation with another fund to benefit from larger economies of scale.
Skip ahead to 2025, and this shift in strategy seems to be working. The latest continuation vote saw only 13.6% of shareholders vote to liquidate the business – a significant improvement. At the same time, it seems the sun’s decided to come back out to play with UK generation coming in 9.4% above budget.
Sadly, this was offset by an 11.7% forecast miss in Spain due to grid outages and an 11.1% miss in Australia as cloudy skies continue to be problematic. Nevertheless, excluding infrastructure outages, global generation has so far been 1.9% ahead of expectations.
The bottom line
Looking at Foresight’s energy price hedging portfolio, the company’s projecting the whole price of electricity per megawatt hour to fall from £85.48 in 2025 to £79.80 in 2027. Greencoat UK Wind, another renewable energy generation trust, has projected a similar trend, albeit with more pessimistic figures.
That means, all else being equal, Foresight’s cash flow is likely to shrink unless it can acquire new assets along the way. And finding well-positioned solar farms at an attractive price could be challenging. Consolidating with another renewable energy enterprise could also help solve this problem. But so far, the company hasn’t had much luck in finding a suitable target.
All things considered, Foresight appears to be in a stronger financial position than its share price discount would suggest. And today’s impressive dividend yield remains affordable. But whether that will remain the case several years from now is where the uncertainty lies. With that in mind, investors may want to consider taking a deeper dive into this seemingly lucrative income opportunity.
