Bluefield Solar Income’s solid business model and record of meeting or exceeding distribution targets should see it pay the highest covered dividend in the listed infrastructure sector over the coming year, according to Numis Investment Companies.
The analyst group noted that the trust achieved its dividend target of 7.43p a share in the 12 months to the end of June, after beating it in the previous three years. It is targeting an increase of 3.4 per cent to 7.68p in the year ending 30 June 2019, representing a dividend yield of 6.3 per cent.
Rather than taking on development risk itself, Bluefield Solar Income funds the EPC (engineering, procurement and construction) firms which build solar panels.
James Armstrong, managing partner at Bluefield, said this is the safest approach to investing in renewables as the process only takes a few weeks and the solar panels are “very simple bits of kit”.
“The beauty of them is that they will do what you expect, they just sit there in rows and rows,” he explained.
“There are no moving parts, they are very static. I have heard them described as Meccano for grown-ups – so you don’t have to worry about putting the wrong type of feedstock in, for example.”
So, if investing in the solar industry is so simple, why isn’t everyone doing it? Armstrong said the trust’s entire strategy is based around “a fairly relentless focus on paying the right price for the right-quality assets”, adding: “If you buy at the wrong price or you get a bad asset, you are not going to suddenly create something which is very high yielding – they just don’t work like that.”
“The proof of that statement is that we built up our company between 2013 and 2016, and while everyone has been asset gathering for the past two years, we have barely bought anything – the reason being we can’t get the quality or the valuations.”
All of the trust’s assets are domestically-based. While there may be some scepticism about the UK’s suitability for solar energy, Armstrong pointed out the panels get their energy from radiation – meaning the amount of power they generate depends on the number of daylight hours rather than the weather.
As a result, the difference in the amount of power they produce sits within a range of 6 to 7 per cent, compared with 18 to 20 per cent from wind power.
“It is a very stable source, which is why the pre-eminent form of renewables by miles over the next 10 years is going to be solar,” Armstrong continued. “No pun intended, it is going to eclipse everything else.”
Numis noted that 60.7 per cent of the trust’s revenues over the past 12 months came from feed-in-tariffs and renewable obligation certificates. As a result, in the unlikely scenario of power prices falling to nil, 62 per cent of the trust’s revenues are guaranteed over the next 15 years.
Armstrong said that even though power prices only affect around 40 per cent of Bluefield Solar Income’s revenues, it is their unpredictability that poses the biggest threat to its business model. He pointed out the trust “hit this threat head-on” shortly after launch when the UK baseload power price fell from about 55£/MWh to below 35£/MWh. It reacted by striking shorter, one- to three-year contracts – and still managed to deliver ahead-of-target dividends over this period.
Source: Bluefield
“That said we now have a situation [following an increase in energy prices] where the contracts we are striking are 20 to 50 per cent higher than we have struck historically, so our average weighted power purchase agreement price is very significantly higher,” he added.
Numis is a big fan of the trust, saying: “In our view, each reporting period provides further confidence in Bluefield Solar Income’s strategy, underpinned by the high level of transparency around portfolio valuation and potential future returns.
“We continue to believe that Bluefield Solar Income offers one of the best risk-adjusted returns amongst the listed renewable fund peer group, given its high performing asset base, conservative approach to leverage and pricing discipline in respect of acquisitions. We feel this warrants a premium to the wider peer group.”
Bluefield Solar Income has made 55.49 per cent since launch in July 2013, compared with 44.42 per cent from the IT Infrastructure Renewable Energy sector.
Performance of trust vs sector since launch
Source: FE Analytics
The trust is yielding 5.75 per cent and has ongoing charges of 1.08 per cent. It is currently on a premium of 11.92 per cent compared with 6.73 and 4.2 per cent from its one- and three-year averages.