RE: Unloved Sector27 Jan 2026 15:38
LeeRex, my take on it is this:
The business model doesn't work when the shares trade at a significant discount to their NAV. The basic business model is fine (imo) in that they generate and sell electricity - some of it at contracted rates. The bean counters have done their bit to work out that the revenue is enough to cover their debt repayments for building the solar farms in the first place, taking into account subsidies, and to leave X amount left over to pay a dividend to shareholders who stumped up the capital. Hence we have a strange situation where the huge dividend yield is covered by earnings (just).
However, for the investment trusts to grow and become more efficient and generate extra revenue to increase the dividend, they need to have a pipeline of projects (more solar farms). In fact, they do. But they struggle to finance them because if their share price is much below the NAV (and it is) they can't raise new capital without p****** off existing shareholders by diluting them. Secondly, they can't easily borrow funds because (i) they started off doing this when interest rates were practically zero and that made the maths work, and (ii) lenders now will be wary of the companies' finances and charge much higher interest. That means that the revenue they will generate will not cover the capital cost of building the new projects.
Some of the renewable ITs are trying to recycle capital....aka sell one project to have the money to build another one. But prices are weak so that is basically robbing Peter to pay Paul. And that leaves the ITs in a zombie state where they can basically just about afford their current arrangement but they can't grow and inevitably they will just wither and decline.
Buybacks at a discount to NAV will help make the dividend more covered, but they don't have much spare cash from revenue to make much of a dent. If they use funds from the asset sales they are just eating themselves and the decline continues.
They could (and should imo) be looking at merging with other ITs. But management egos get in the way. Alternatively, they could be bought out by infrastructure ITs which are much larger would give the renewables access to the capital they need. See HICL and TRIG's proposal. But the infra ITs are in better shape and their shareholders (including me) don't want them to buy renewables unless they are getting them for an absolute bargin. So don't expect that option to make a huge difference either.
Last point, falling interest rates will help lift the NAV and share price as it returns the renewables to closer to the ULIR environment from which they spawned.
I've got plenty of NESF, FSFL and BSIF so not happy to see this situation which I have largely learned after the fact. The income is great and I hope the share prices have bottomed-out, but not really happy overall.
Sorry for long-winded reply.
Guitarsolo
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