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The only point in your list that concerns me is "reducing wind speeds". A few years agso, I read an article in 'New Scientist' suggesting that the "free energy" that could be recycled by wind turbines was much less than implied by the kinetic energy in the wind. And UKW has just reduced its projections for wind resource. Yet even with these lower projetions, the NAV per share is over 150p using an unleveraged discount rate of 10% per annum. The mostly likely explanation is the shares are simply undervalued by the market. Anyone who doubts that the market can undervalue shares should look at the share price of Rolls-Royce over the last 12 months.

Yes, the UKW dividend has grown faster than other renewablw trusts, which the company says is because they re-invest more of their profits, reducing the need to raise capital for growth. Seems incredible now, but the UKW dividend yield was below 5% just a few years ago.

Logic dictates that those who invest heavily at the bottom are a lucky few. If this were not true, the share price would rebound before it got to the bottom! So I and other long-term investors are currently sitting on capital losses, confident that the share is worth much more than its market price.

NESF has the option to redeem the preference share issue at par value for a 6-year period following 2030. Obviously they should not do this unless the shares are priced above par, which won't happen unless long-term borrowing rates fall to the low level they were at the time of the issue. The decision to raise capital at the cost of a 4.75% fixed dividend looks like a very good one. No company could do that in the current environmet.

In 2036, the preference share holders can convert their holdings into ordinary shares, receiving shares of equivalent market value to the par value of their preference shares. NESF would then incur a loss if the preference shares were priced below par. 2036 is a long way off, so it all depends what happens to long-term borrowing rates over the next decade.

Hi Gavster,

I don't see why Trump 's utterances would have any impact on UK energy policy, but maybe some investors are spooked. It's worth bearing in mind that short-term traders have no interest in fundamentals and are only guessing price trends.

Hi Dartron, I agree with you on the impact of higher yields, as the post-budget rise in gilt yields has resulted in lower market prices for all renewable energy trusts. As regards the NESF debt level, this is only high if you include the 4.75% preference share capital as debt, even though this will never have to be redemeed and the 4.75% fixed dividend is a looks very cheap in the current climate.

Hello Alas_Smith,

Lower interest rates should have a positive impact on the SEQI share price, yet it will also reduce the fund's income from floating rate debt. Even fixed rate debt would have to be re-invested at lower rates after it is redeemed.

Over the last 5 years, the interest income (per share) has risen by about 30%, while the share price has fallen by a similar percentage, all because of higher interest rates. The question is whether the current dividend can be sustained (and hopefully increased) in a lower interest rate environment. This is why reinvesting part of the interest income to increase net assets per share is important at the current time. Share buy-backs also have this effect.

Hello Dr Patience,

The recent adverse factor was the increase in long gilt yields after the budget - the 10-year gilt yield increase from 3.8% to 4.5% over a short period. FGEN has also blown 20 million on a failed investment which made the fall in its share price steeper than others in the sector.

The key issue is what happens to inflation over the next 12 months. The broad money supply has been flat over the past 2 years, which could mean inflation continues to fall and the BoE starts cutting rates aggressively. If that happens, I'd expect major capital gains for renewable energy and high yield bond funds.

Hello Dangerousdonald,

One has to wonder who is selling at these prices. The directors of SEQI suggested that higher interest rates have led to "forced sellers" of SEQI shares, although they didn't explain why this was so. Maybe a lot of shareholders had leveraged positions which they had to unwind. What seems obvious is that the root cause is higher interest rates and tight credit rather than any sector specific factor.

Hello Douvrey,

Well done on buying at 70.9p!

The justification for buybacks is that the company's own shares are a better investment than new generating capacity. Hence they will cause net assets per share to grow, even if the company itself is not. I would also like to see the company investing again, but I don't think that will happen until the share price recovers.

Hi Guitarsolo,

It's natural to have concerns when the share price is so devalued and dividend yield seems implausibly high.

As far as I can see, the only thing that has changed for the worse compared with 5 years ago (when the share price was 120p and the payout ratio was one) is much higher interest rates. This, in my view, is the reason for the low share price. Not because of the interest burden for NESF, but because investors' cash been switched into low-risk bonds or been used to pay down debt.

I was also reassured to discover that NESF is one of the small number of equities held by NCYF, which is a high-yield bond fund. NCYF has a team of credit analysts and would not be investing in NESF if they thought there was a risk of a dividend cut.

"Government contracts" are actually "contracts for difference" that effectively allow renewable energy generators to sell electricity at predetermined inflation-adjusted prices. Hence they enable companies like UKW to reduce their exposure to power price risk. Whether they are a subsidy depends on future power prices - if electricity becomes more expensive than expected, the contracts will generate revenue for the government.

IMO UKW and other generators are right to delay further investment in generating assets if these contracts are not available on terms that will provide an adequate return on capital. Buying-back shares at a discount to par might objectively be a more attractive investment.

Yes, UKW is not a REIT.

"Not a big fan of share buy-backs generally"

Wouldn't you say that depends on the price, D0ubtf1re? At the current discount to net asset value, UKW's own shares might give a better projected return than new wind assets.

Hello Conger2,

There's a good description of the risks in the annual report. IMO the price of electricity is the most obvious one. However the price projections made by all these renewable fund seem quite conservative and assume a decline in real terms. I'm hoping more electric cars will provide some support. I'm not really worried about political risk - windfall taxes are likely if power prices shoot up, but that's just knocking a few cherries off the cake.

Hello again Peterg,

JLEN may be different from most of the equities in your portfolio in that it is an investment trust. Hence when its share price is significantly lower than the value of the assets it holds, some shareholders may say "sell your assets and give us the net asset value of each share, which will be higher the current share price".

Short-term investors would be happy to make a profit in this way, but for longer-term investors like you and me, who rely on the income from the Trust, this would not be a good outcome, particular as we could not use the cash to construct a similar portfolio to JLEN.

FSFL is another renewable energy trust that I invest it, which recently had a discontinuation vote. The shareholders voted not to discontinue by 75% to 25%. For this reason, I don't expect the JLEN discontinuation vote to pass.

Hello Peterg40,

My understanding is that a discontinuation vote would require the trust to sell all its assets, repay its debts and return the cash to the shareholders. Maybe each shareholder would get the net asset value per share less expenses. It depends on the terms it could negotiate with potential buyers. I would definitely vote against discontinuation because even at net asset price the projected return on the shares is over 8% per annum (discount rate minus expense ratio). At the current market price of

Hello Damienmoore,

I must say I'm surprised you're still investing in this trust given the issues you've uncovered. I hope the price continues to recover from the recent low.

Regarding options, I believe the strategy to convert capital growth into income is selling call options on shares you hold (covered call writing). I think this is less objectionable than dividend-washing because it doesn't increase capital losses, it only reduces capital gains. Do you have any reason to believe they have stopped buying cum-dividend shares purely to obtain the next dividend?

Hello Starbright,

Graphs showing the power price forecast are also on the same page. As you say, they assume that the recent spike will be reversed and power prices will be much lower, in real terms, over the next 20 years. It's reassuring that the cash-flows can withstand this - it seems much of price volatility has been hedged.

Hello Starbright,

Reductions in NAV caused by a higher discount rate are nothing to worry about. But reductions due to reduced power price forecasts and "project actuals" are more of a concern (see page 50 of report for details).

The graph I have used to construct my own cash-flow model is on the bottom right of page 53. The projected revenues shown are from operational assets and should allow for the latest power price forecasts. They do not include revenues from new assets that will emerge over time. Based on this graph, the projected return on buying the shares at 77p is over 12% per annum. This would reduced to 9-10% per annum if the shares were bought at 105p.