NextEnergy Solar - Portfolio Addition

Having dipped a toe in the water of solar infrastructure with my purchase of Bluefield Solar and Foresight Solar earlier this year, I decided to complete the set and add NextEnergy Solar Trust (NESF.L) to my green portfolio (thanks to a nudge from Richard).

This is the largest of the three with assets of £730m and the company has recently been elevated to the FTSE 250. Launched in 2014, the trust operates a portfolio of solar 'farms' located mainly across the South of England however in 2017, they acquired the Solis portfolio in Italy which accounts for around 25% of total operations.

According to the latest annual report to end March 2019, the company performed well over the previous year with energy generated being 9% above budget mainly due to more sun than average. Total return for the year including dividends of 6.65p was 11.8% (FTSE All Share 8.8%). Over the 5 years since launch, the average annualised return is 9.5% p.a.

Around 2/3rds of the existing portfolio benefits from the usual government ROC subsidies. The rest of the portfolio revenues are derived from purchase power agreements with utility companies. These government subsidies are no longer available for new installations however the company has decided to move ahead with a new subsidy-free 5.5MW solar unit at Hall Farm in Leicestershire which is due to be completed shortly. They will then start work on a second 50MW project in Bedfordshire which will be the largest in the whole portfolio. Like Bluefield, they are working on a strategy to extend the life of existing assets and negotiate lease extensions and planning approvals which should help to increase net assets.

It will be interesting to see if this subsidy-free strategy can generate comparable returns but it is quite likely due to the falling costs and increased efficiency of the PV technology. One area which could benefit these companies is storage - battery or otherwise - because it will be a big advantage to store energy when abundant and sell it when there is higher demand. I am guessing these companies will already be looking into this area.

Dividends

The company pays quarterly dividends and the target for the current year is 6.87p - an increase of 3.3% on last year. I have purchased the shares at 120p in my Halifax ISA so the fwd yield is 5.7%. As can be seen from the chart, the share price has been fairly stable over recent years and I will be happy with any modest increase in addition to the dividends.

The shares currently trade at a 10% premium to underlying NAV of 110p which seems to be broadly in line with the others in this sector.

Ongoing charges are 1.1% which seems on a par with my other solar funds. There are a number of large institutional shareholders including Prudential, Artemis, Investec, Baillie Gifford and Legal & General

 

3 Yr Comparison v Bluefield Solar
(click image to enlarge)

In just a few short years, investment in renewables has moved from niche/risky to mainstream/solid as we transition quickly from fossil fuels to clean energy. Solar and wind can now compete on cost alone with natural gas and nuclear and this makes it easier for policy makers and government to promote renewable energy as a larger part of the mix.

A recent analysis from Carbon Brief suggested almost 50% of our electricity will come from renewables by 2025. This includes wind, biomass and hydro/wave as well as solar but it means that capacity for solar should expand from currently 5% to approx. 10% over the coming few years. Hopefully the likes of NextEnergy will secure a share of this growth.

The UK is to host the IPCC COP 26 gathering in Glasgow next year and I expect to see further government policies to increase renewables which will demonstrate leadership on climate and back up the recent decision to move to net zero emissions by 2050.

Of course as with most investments, the sector is not without risks. I suspect the main one would be a decline in the prices NESF could secure for supply of electricity and the need to revise its long term assumptions which would have a negative effect on NAV. There are also political considerations both here and in Italy so these aspects have to be weighed in the balance.

This addition takes my 'green' allocation to over 50% and I am pleased to say that following the recent disposals of Vanguard Lifestrategy and HSBC Global Strategy funds, my portfolio is now fossil-free and climate-friendly (more on this in a future post).

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!

Bluefield Solar Trust - Full Year Results

Bluefield Solar (BSIF) was added to my SIPP portfolio in March. It's focus is purely on solar power in the UK and the technology is advanced but fairly simple with few moving parts to go wrong. It is one of the largest solar operations in Europe with net assets under management of around £436 million and generating 470MW of electricity is sufficient to power 150,000 homes.

Approximately 60% of their solar assets are covered by the old subsidy scheme which provides a guaranteed return for 20 years from the date of connection to the grid. The other 40% have rolling power purchase agreements which generally last for between 12 months to 3 years and are then renewed.

Results

The company has today issued full year results to end June (pdf link via company website).

The report seems positive. Underlying earnings per share increased by 13.8% to 11.01p and the total return including dividends was 19.1%.

The company pays quarterly dividends and will pay out a total of 8.31p for the year which includes an additional payment of 0.63p which gives a yield of 6.3% based on the current share price of 131p.

The total annualised return for shareholders since launch in 2013 has been 9.6% p.a.

 

3 Yr Performance v Foresight Solar
(click to enlarge)

Chairman John Rennocks said: 

"The year has been outstanding with above target earnings and dividends, a satisfying result for a Company that has as its first priority the delivery of attractive levels of sterling income, covered by earnings.

The explanation for the outperformance is straightforward. The period had higher than average irradiation (+6.6%), favourable conditions which were effectively translated into high levels of actual generation (+7.5%), made possible by the quality of the operating portfolio and a credit to the work of BSL.

This increased generation was then converted into high levels of revenue, enhanced in the period by the Company being able to respond to, and capture, higher power prices.

The Company has also seen a modest increase in its NAV. The main driver for this is the significant progress the Company has made in lease extensions on the portfolio, which have offset the lower power price forecasts since December 2018. As detailed in the Investment Adviser's report, the Company has had several successful planning determinations on 15 year lease extensions (amounting to over 100MWp), with a further 64MWp still awaiting an outcome or under negotiation. Significantly, the Company has not had, at the time of writing, any planning rejections".

Future Expansion

The trust's portfolio has been fairly stable for the past couple of years with 87 solar 'farms' located mainly across southern England. The UK governments subsidy for renewable infrastructure has now ceased (short-sighted imo) however, the cost of solar has fallen dramatically - 50% reduction over the past five years - and this should provide opportunities for growth.

The company are currently looking for opportunities to increase assets and a number of potential sites are currently under consideration to support the next phase of growth.

As mentioned above, BSIF are in the process of increasing the life expectancy of its solar assets from 25 years to 40 years subject to planning considerations and agreement with the owners of the sites. Successful negotiations have been completed on a two thirds of existing assets and will hopefully be concluded over the coming months. This could add a further 5% to net assets. The boost to asset appreciation over the past year means the discount has narrowed and the shares are currently trading at a premium to NAV of around 12% - down from 20% earlier this year.

My holding in Bluefield Solar accounts for around 6% of my 'green' portfolio which has been gradually building over the past year. The government will roll out its plans to get us to net zero emissions over the coming months and I am sure solar, wind and wave plus battery storage will continue to benefit from the transition away from fossil fuels. I feel comfortable with this trust in the mix and will continue to hold and roll up my quarterly dividends within my SIPP. I look forward to seeing how the management deal with expansion of the portfolio and whether debt increases but for now it can return to the bottom drawer.

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!

AFC Energy - Portfolio Addition

As so often is the case, whilst researching energy from hydrogen in connection with my recent purchase of ITM Power, I was sidetracked by another player in the same sector.

AFC Energy (AFC.L) is a small company listed on the AIM market. However it is one of the market leaders in the hydrogen revolution as we transition from fossil fuels to clean energy. Hydrogen is regarded as a key element in the governments announcement to reach net zero carbon emissions by 2050. The UK will host the COP 26 UN climate conference in 2020. This will focus the governments attention on climate issues and push forward policies to bring about its objective of net zero emissions.

About AFC

They are a next generation energy company offering to deliver zero-emissions electricity wherever and whenever it is needed.

The company provides large scale off-grid fuel cell systems from a basic 10 kW up to a 1.2 MW based on a modular system developed in 2018. Fuel cell technology has been around for many years but the high costs of production has held back the wider commercial uptake.

The company has also developed the world's first electric vehicle charger - CH2ARGE and is now looking to enter the EV charging market. They have signed a collaborative agreement with Europe's largest EV charging point manufacturer.

Fuel Cell Technology

Hydrogen is the most abundant element in the universe. The AFC system is fairly simple - the input is a mix of hydrogen and oxygen (from the air) which is converted in the cell to provide electricity, water and heat. The electricity produced will be continuous so long as there is input of hydrogen and air.

Their fuel cell can be deployed as part of a "hydrogen battery" scheme. When grid demand is low, the excess power generated from renewables such as wind and solar, can be diverted to a water electrolyser for clean hydrogen generation. This can then be stored and optimally released to the company's fuel cells at periods of peak demand (higher tariffs) to support a more flexible grid.

In the most recent half-year report (pdf via company website), Adam Bond, CEO since 2014, said: "The productisation of AFC Energy’s fuel cell system is now well underway. Delivery of the first hydrogen fueled EV charger for deployment across the UK later this year, to be followed by modular stationary off grid power systems, highlights the corner AFC Energy has now turned in taking its hydrogen power units to market. This in no small way has been driven by the acceleration of Government policy towards decarbonization of the transportation sector in parallel with the push for reduced air pollution from the off-grid power market.

The last six months has seen several important landmarks in our history, including the achievement of record electrode lives in collaboration with De Nora, further progression on the cost reduction of electrode manufacture, the bringing together of the supply chain for our systems’ mass production and the introduction of AFC Energy’s new high power density alkaline fuel cell system. I am particularly excited about the growing success in system integration we are seeing, including the potential for the steps forward in the use of ammonia as a lower cost fuel for point of use hydrogen generation, which will allow us to target new growth markets for the fuel cell, seeing AFC Energy as a leading exponent of the rapidly emerging hydrogen economy, both in the UK and internationally."

AFC 12m share price (click to enlarge)

Obviously there is huge potential in the hydrogen sector as we transition towards low carbon energy solution. The likes of AFC Energy could expand rapidly if their solutions prove to be popular but other players will enter the market as it grows so there are risks for investors.

I am encouraged by the 33% uplift in ITM Power over the past two weeks so I am prepared to modestly speculate with AFC and have added this share to my green portfolio at the price of 4.8p - as can be seen from the above chart, the share price can be very volatile...but you get an awful lot of shares for your money!

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation... investing in smaller companies can be rewarding but is higher risk - always DYOR!

First Solar - New Addition

First Solar (FSLR) is a leading global provider of PV solar energy solutions. They offer a cheaper alternative to conventional fossil-fuel power production such as coal or natural gas. It has a market cap. of $6.5bn, the largest in the renewable energy sector. Head office is based in Arizona and the company was first listed on the NASDAQ exchange in 2006.

The company has over 17 GW of capacity installed worldwide. Their technology is unique - rather than the conventional panels made of silicon, First Solar make use of ultra-thin panels using cadmium telluride. This PV technology displaces up to 98% of greenhouse gas emissions compared to fossil fuel generation. The modules have approximately half the carbon footprint of traditional silicon PV panels.

Furthermore, the company's focus is on utility-scale solar projects which do not rely upon state subsidies. It is involved in every stage of the process - manufacture, finance, maintenance and will recycle materials when they come to the end of their natural life.

First Solar v Nasdaq Index
(click to enlarge)

The Global Transition to Renewables

The world is rapidly transitioning toward a future powered by renewable energy. In the last five years alone, around $1.5 trillion has been invested in building renewable power generation facilities to help power the global economy. This new capacity has added 1 million megawatts (MW) to the worldwide power supply.

According to the latest Vox report, most of the world's new renewable capacity is solar photovoltaic (PV) panels. Of all the new capacity installed in 2018, 55% was solar (100GW), wind 28% and hydro 11%.

However, despite that massive spending, solar and wind still only account for less than 10% of the world's total energy use. Heating and cooling accounts for 50% of global energy usage and this is mainly natural gas and oil. Transport accounts for a third of global energy use and this is mainly petrol/diesel. Clearly if we are to meet our climate targets, transition to net zero emissions and halt global warming, this need to change quickly.

So, there is still much room for growth of solar and wind. I expect this to increase from the current 10% to 30% minimum by 2030 given the concerns about global warming and climate. Because of that, there's a big opportunity ahead to continue building more renewable power capacity, with one estimates at more than $10 trillion, to replace the current carbon-based power systems in the world's largest markets. The opportunity is even larger when factoring in population growth and the electrification of transportation.

Therefore companies such as First Solar have the potential for much further growth over the coming years. However, there will be increasing competition particularly from the fast-growing economies like China and also government interference like the recent imposition of tariffs by Trump and new regulation so the investment case is not without risks.

The company has recently introduced a new range of Series 6 panel which should boost demand and earnings for the next few years. Although the share price has had a good run over the past few months - up 40% year to date - I am hoping there will be more to come with the rise of ESG funds and the global expansion of renewables. 

With sterling having dropped to $1.23, it's probably not the ideal timing but I have decided to dip a toe in the water with my first US-listed holding at the price of $62. The shares are held in my SIPP.

As ever, this article is merely a record of my personal investment decision and should not be regarded as a recommendation - always DYOR!

Mid Wynd Trust - Full Year Results

Mid Wynd International (MWY) is a theme-based global investment trust. The strategy is to hold around 60 - 70 investments comprising between 8 to 10 themes. Current themes include Automation/Robots 14%, Emerging Market Consumer 15%, Tourism 5%, Healthcare & Immunology 17%, Online Services 16%, Low Carbon World 7%, Screen Time 11% and Scientific Equipment 6%.

The management team led by Simon Edelsten have built a portfolio of high-quality holdings which focus on a number of trends which offer the prospect of long term growth.

The shares were added to my ISA portfolio in April 2018 at the price of 474p.

Results

Mid Wynd have this week announced results for the full year to end June 2019 (link via Investegate). This has been another good year with share price total return up 15.2% compared to the All Country World Index 9.7%. Over the past 5 years, net assets have increased by 115%.

I have acquired this trust mainly for growth but it does offer a yield of around 1.0%. The total dividend for the full year will be increased by 5% to 5.83p (2018 5.55p) which is covered by revenues of 6.79p.

3 Yr Chart .. MWY v FTSE All Share
(click to enlarge)

Since acquiring these shares last year, I have written to the managers urging them to include climate as one of their themes and I am pleased to see that they have now made several additions under their Low Carbon theme...including Orsted. So, it obviously pays to ask and I am chuffed!

The managers appear to be climate-aware and avoid coal, fossil fuel stocks and the mining sector which together account for 12% of the global index. This is one of the big problems for ethical investors holding global index funds.

Low-Carbon World

Of course, one of the themes is tourism which is not so climate-friendly and I was pleased to see the managers have reduced exposure from 13% to 5% over the past 12 months. Maybe they will eliminate this theme by next year and build up Low Carbon.

Here's an extract on sustainable investing from their report :

"Over the year a number of investment houses have made much of the sustainability of their investments or of how their funds score on measures of environmental, social and governance factors. As we aim for longer term investment success, we have always included these factors in our selection process. Our interpretation of the factors is based on common sense and real-life situations, rather than any tick list or 'one-size-fits-all' screen. As an example, we think that air travel may remain essential in large Asian countries while the environmental damage of cheap flights may become unacceptable in Europe.

We are not, however, looking to change the world; and nor do we presume to have an ethical code that all would follow. Our aim is to invest in companies which prosper without damaging society or the environment. We believe that this is an aim that we share with our investors and that this perspective is, and has always been, central to the management of a successful Investment Trust".

This is early days for me, just a year and a half in. The share price is currently 595p so a rise of 25% since purchase. Having recently disposed of Scottish Mortgage Trust, I may well look to increase my holding in this trust should there be a dip in the price - which is currently at an all-time high.

But for now, this can return to the bottom drawer.

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!

Vanguard Lifestrategy - Portfolio Sale

The Vanguard Lifestrategy funds have been a cornerstone of my globally diverse passive portfolio for several years. They had been on my watchlist for a couple of years prior to my first purchase of the VLS60 in May 2015.

Since I started to move my portfolio towards more climate-friendly funds last year, I was concerned about the over exposure of the funds to the oil & gas sector due to its 25% equity allocation to the FTSE All Share index. For the past 10 months, I have been in regular contact with Vanguard Investors urging them to provide some low carbon sustainable funds as an alternative for investors who wish to avoid oil stocks. Despite many assurances that they are working towards such offerings, so far nothing has materialised.

I recently learn from @ShareAction (Twitter) that Vanguard's executives in the US have been voting to prevent the directors of big oil companies such as Exxon, Dominion and Duke from facing accountability on climate. This is a big red line for me.

I therefore no longer wish to be associated with a company that protects the likes of Exxon from climate scrutiny and have decided to dispose of my Lifestrategy 40 fund and will close my Vanguard Investor ISA. I have emailed Vanguard UK to inform the management of the reasons for leaving and I hope they will pass this on to the senior executives in the US.

The funds - VLS60 and 40 - have provided a steady return over the past four years - combined is just over 40% in total, so no complaints on that score. I realise my actions will be a mere drop in the ocean but I hope Sean Hagerty and the senior executives in the US will start to take our climate emergency seriously when investors begin to withdraw their investments and assets under management start to fall.

As ever, this article is merely a record of my personal investment decision to sell and should not be regarded as a recommendation - always DYOR!