SMALL CAP IDEAS: Cloudless skies highlight Bluefield Solar Income Fund’s yield appeal
Bluefield Solar Income Fund was the first UK solar power trust to join the stock market.
That was six years ago and while the weather might be unpredictable, Bluefield Solar has proved anything but.
Since listing in 2013, it has consistently paid out a dividend on or above its target of matching RPI inflation
There is also every chance it will continue to pay good dividends from running solar farms across the UK for many years to come.
James Armstrong, of the trust’s investment adviser Bluefield Partners, believes there is a structural shift now underway towards renewables in the UK energy business led by solar and wind power.
‘They are here to stay,’ he says, adding that another seismic change for solar is fast approaching in the form of the industry being economic without any form of subsidy.
‘That would be incredible,’ he adds, given where the sector was ten years ago, reflecting a 90% drop in the cost of installing solar capacity.
Bluefield Solar has £650million worth of assets under its control producing about 465Mw of electricity or enough to power around 140,000 homes.
That makes it one of the largest solar portfolios in Europe, not just the UK.
Around 60 per cent of its output is covered by the old subsidy scheme through the ‘grandfathering principle’, which locked prices in place for 20 years from the time an asset was connected to the grid.
Prices are also inflation-linked and that, with the subsidies, makes for a very visible and predictable income stream.
Of the remaining 40 per cent, Bluefield arranges power purchase contracts that run for up to three years.
The trust has been able to take advantage of a strong power market over the last nine months to lock in good prices for at least the next two years.
A while ago, Bluefield made the decision that due to rising prices of assets it was not going to acquire more unless a truly exceptional opportunity arose.
That has kept the portfolio relatively stable, but the net asset value has improved as prices for solar assets have continued to rise.
Armstrong says changes to the market mean the challenge now is to find assets that are priced attractively – only 2 per cent of opportunities presented to Bluefield were taken up in 2018, for example.
Instead, the focus has been on asset optimisation measures to improve the returns on its existing portfolio – things such as lease contracts, power prices, and batteries.
Armstrong says it’s impossible currently to be in the renewable space and not be talking about batteries/storage.
Being able to match demand for electricity from renewables with when it is most needed has been one of the major hurdles for the renewables sector, but the huge strides being made in battery technology suggest it is the answer.
The ability to store power will mark a fundamental shift for solar and other renewable power producers, he says.
Bluefield has surplus capacity and excess land at present and while it may not be directly involved in their development, he envisages a situation where battery groups set up on its facilities.
‘We are always looking at storage,’ he says, but the plan currently is to prime its land for the possibility through planning permissions and see then the direction it takes.
‘We like the idea of second mover advantage here,’ he says but adds that undoubtedly the advent of batteries will be good both for Bluefield Solar and the renewables sector.
Bluefield’s net asset value was 113.4p at the end of March, which puts the share premium at 20 per cent at 137p.
On traditional trust yardsticks that looks punchy but underlying earnings in 2018 were £17.9million and based on the first two quarterly payments of 1.9p the yield currently is 5.5 per cent.
Such high income backed by strong fundamentals explains Bluefield’s premium to NAV, though the other listed solar vehicles also trade at premiums.
While the fund is primarily backed by institutions, Armstrong says that its yield should appeal to all investors especially with fixed income and savings offering such a meagre return currently.
‘Earnings have also stood up well since IPO and the fund has kept delivering on its targets.
‘Single technology, UK focused renewable funds are the best opportunity in our view for people seeking sterling income.
‘It’s a great place for investors to get some stable, attractive income,’ Armstrong concludes.