To provide Shareholders with an attractive return, principally in the form of quarterly income distributions by being invested primarily in solar energy assets located in the UK.
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A very strong statement from the Chairman, particularly with respect to dividend cover. As always with these co.’s the results themselves are hard to unpick and understand, but I will be taking a close look.
John Scott, Chair of Bluefield Solar, said:
"I am pleased to present another robust set of results which reflect continued operational progress across the Company's portfolio. I reiterate our full year guidance of dividend distributions for the financial year of not less than 8.8pps (2022/23: 8.6pps), which we expect to be covered approximately two times by earnings, net of debt amortisation and the EGL. Based on yesterday's closing share price, this provides shareholders with a yield of over 8.5%. The position of the Company today is further enhanced by its high levels of regulated indexed revenues, complemented by high fixed power sales contracts, a large development pipeline, a defensive capital structure and a robust NAV.
"In the meantime, the Company is delighted to have formed a Strategic Partnership with GLIL, providing a partner with whom we can co-invest for the long term, spreading our capital resources over a greater range of investors.
"Despite these compelling attributes, it has been disappointing to note the Company's share price discount to NAV widen, at times exceeding 25%. Meanwhile ample transactional evidence adds further weight to the credibility of the Company's valuation, which is in stark contrast to the share price. We remain entirely confident that Bluefield Solar is well placed to perform the task it has executed so well for over a decade, playing a significant role in the continuing development programme that is so clearly required to expand the UK's supplies of indigenously produced green electricity, while creating compelling growth and income for shareholders, with a total return of 110.14% since IPO."
Great statement from the Chairman but I don't understand the numbers. I can only assume they've released the wrong set of accounts:
Total operating income 6 months to 31/12/23 £5.1m???
Total operating income 6 months to 31/12/22 £38.8m
Total comprehensive income before tax 6 months to 31/12/23 £4.0m???
Total comprehensive income before tax 6 months to 31/12/22 £37.6m
Makes no sense at all. Hopefully they'll release an amended version soon so we can see how they've actually performed.
This is the bizarre accounting required by International Accounting Standards whereby unrealised revaluation gains and losses go through comprehensive income. Underlying earnings are much more meaningful and are analysed in Note 6.
OK thanks Tyma, I'll have a look. Bizarre as you say - how on earth are "ordinary" investors supposed to make investment decisions based on information released by companies like this?
I tend to focus on the NAV and the underlying earnings per share (pre- and post-amortization).
I'm having difficulty squaring the latter figure, 3.57p, with the chairman's statement: "I reiterate our full year guidance of dividend distributions for the financial year of not less than 8.8pps (2022/23: 8.6pps), which we expect to be covered approximately two times by earnings, net of debt amortisation and the EGL." I assume that "net of debt amortization" means post-amortization. Extrapolating 3.57p to a full year gives 7.14p, a long way short of the 17.6p needed for 2x cover. As far as I can see, the EPS (post-amortization) for the second half of the FY would have to be more than 3 times as much as the first half to make the chairman's statement true. The more likely explanation, I think, is that the chairman made a mistake and the 2x cover is actually pre-amortization (which is what I would have expected).
Yes, it depends on how you treat the debt amortisation when defining cover and I agree with your expectation. Not sure it is a mistake as such, more an outcome of the definitional chaos that funds operating in this sector are creating - in conjunction with IAS craziness…
Now who can help me better understand what is meant by “Date change and degradation” in the directors valuation waterfall. It represents the largest single component (-£62m) of the reported change, and doesn’t appear to be defined or explained anywhere as far as I can see. Perhaps I have missed something obvious? Thoughts / help welcomed!
I may have found the answer. ChatGPT says….
"Date change and degradation" in solar power generation refers to two distinct aspects:
1. **Date Change**: This refers to the performance change in solar panels over time. Solar panels gradually lose efficiency as they age due to various factors such as exposure to weather elements, degradation of materials, and unavoidable wear and tear. The decrease in efficiency over time is commonly known as degradation.
2. **Degradation**: Degradation specifically refers to the reduction in the performance or efficiency of solar panels over time. It's a natural process that occurs as solar panels are exposed to sunlight and environmental conditions. Manufacturers typically specify the rate of degradation, which is the average annual decrease in efficiency that can be expected over the lifetime of the panels.
Monitoring and accounting for degradation is crucial for accurately estimating the long-term performance and output of solar power systems. It allows stakeholders to plan for maintenance, replacement, and anticipate changes in energy production over the lifespan of the solar panels.“
Thanks, SB. I was wondering about that too. In fact I was struggling to understand most of the items in the NAV bridge. I thought "Date Change" might refer to a change in the life expectancy of the panels. You'd think that, if they'd re-assessed the efficiency/longevity of the panels, they'd mention it in the text.
The chairman's statement mentioned the drop in the NAV, but didn't say anything about what had caused it. Since the drop seems a little at odds with his positivity about the period, I think it's reasonable to expect an explanation.
@tichtich - I have a controversial view: the NAVs reported by renewable energy companies applying the IFRS10 “investment entity” approach [where subsidiaries are recognised at fair value through profit and loss] are largely illusory and should be disregarded by investors. Consequently the NAV discounts that many (most?) of these companies are reporting presently are not particularly relevant or useful. In fact, the term “NAV” is somewhat misleading in this use case.
There are three different ways that investment companies calculate NAVs. They are VERY different to each other. In simple terms:
Method A - the NAV represents the sum total of liquid securities traded on the open market. This is how traditional investment trust NAVs are compiled. It is a largely objective measure, verifiable against third-party data.
Method B - the NAV represents the sum total of independent professional valuations of illiquid (not traded on an exchange) assets. This is how property funds work; they have to get periodic valuations of individual properties performed by qualified independent surveyors. This method is slightly less objective, because it relies upon the professional judgement of the appointed surveyors.
Method C - the NAV represents the sum total of the Director’s valuations of the assets (in this case typically unquoted companies) that make up the fund. The valuations are based upon cashflow projections for the underlying assets, to which a discount rate is applied. This is FAR from objective, because it combines together uncertain projections for future cashflows and arbitrary assumptions for discount rates, interest rates and inflation etc.
The renewable energy companies utilise Method C. Thus the “NAVs” they publish are subject to significant inaccuracy. In no way do they represent a dispassionate view of the “market value” of an underlying portfolio comparable to those of companies using methods A & B. The NAV’s they publish are hugely sensitive to input assumptions for discount/interest/inflation rates. That IFRS10 requires these companies to update their self-generated “NAVs” periodically and recognise the changes as operating income just compounds the mis-representation. If/when interest rates and inflation fall these companies will all adjust down their discount rates and report increased operating income as a result. Even if everything else stays the same; no more projects are made operational, no more wind/irradiation etc. the reported “NAVs” will increase. I think this is nonsensical.
The questionable NAVs however form the basis upon which the management companies “employed” by these funds charge for their services. It is the mechanism through which their operators are paid. Hence it is extremely important to them…
What matters more is the ability of the underlying portfolios to produce sufficient free cashflow to sustain their dividends. I may write a separate post on this another time
I'm aware that the NAVs for such companies are based on a DCF calculation. I prefer that to an estimated market value. I don't care that much about the market value, unless the company is going to wind itself up. I'm more interested in the long-term fundamentals, and what better way is there to assess those than a DCF calculation? Of course, a DCF is only as good as its assumptions. So I do look at those. I've looked more closely at UKW, which I have a much bigger position in, and I think its assumptions are pretty conservative. I haven't looked so carefully at BSIF, and I don't think its assumptions are quite as clearly stated, but as far as I can tell they seem reasonable. Maybe they're a bit less conservative than UKW's, but arguably that's balanced by BSIF's bigger discount to NAV.
If the assumptions are correct and the shares are bought at NAV, their long term rate of return should equal the discount rate. That's 8% for BSIF, but I think that's an "unlevered" rate and the levered rate (taking leverage into account) is probably more like 10%. The DCF assumes long-term inflation of 2.25%, but let's say 2.5% inflation to allow for the higher short-term inflation that's assumed. That makes a real return of 7.5% if bought at NAV, or about 9% at current price, which is a little more than the current yield. I take that as confirmation that the current yield is sustainable (rising with inflation) for the long term, if the DCF assumptions turn out about right. That said, I'd be perfectly happy with a 7% real return, and satisfied with 5%, so there's a decent margin of safety as far as I'm concerned.
Well, that's how I look at, rightly or wrongly.
P.S. The interim report claims that "ample transactional evidence adds further weight to the credibility of the Company's valuation". Perhaps that's a sign that buyers and sellers of these assets are all doing similar DCF calculations, and pricing assets on that basis.
Correction: I should probably have deducted 1 percentage point from my return estimates, to allow for the 1% management fee.