Foresight Solar (FSFL) has shocked shareholders with news that it will have to pay more tax in future, reducing its current valuation, and that its potential hit from the government’s reform of legacy renewable incentives could knock a further 10% off net asset value (NAV).
Long-suffering shareholders in renewable infrastructure funds have had to get used to falling power prices, grid restrictions and higher interest rates piling downward pressure on valuations and forcing cuts in NAV in the past two to three years.
All these were on display today as Foresight Solar revealed NAV per share slid 5.9% in the third quarter, with a tax review adjustment of 3.6p accounting for over half of the 6.4p per share decline.
As a result, NAV per share stood at 102.1p at 30 September, down from 108.5p on 30 June, and down from a peak of 126.4p three years ago.
The shares gave up 4.5p, or 6.4%, to 66.4p to maintain their discount at 34%, close to the sector average. From 125p in September 2022 they have nearly halved although the 11%-yielder’s quarterly dividends have reduced the total shareholder loss over three years to around 20%.
The company said following engagement with HMRC in respect of its group tax structure, a position on historic tax submissions and “clarity” for future tax obligations had been reached. It said “the current best estimate of tax forecasts indicates that future tax payments will need to be increased”, leading to the 3.6p adjustment as post-tax income falls.
Stifel analyst Iain Scouller said it was a complex matter but it appeared Foresight Solar had assumed a higher level of deductions from taxable income than HMRC thought appropriate.
“At this early stage, we hope this is a Foresight-specific issue. However, the market will now be wary of other funds potentially having tax issues. No doubt all the managers will be reviewing their assumptions,” he said.
Chair Tony Roper said: “The valuation reductions and the tax review are disappointing for us and shareholders. The quarter’s challenging news compounds a difficult year for the renewable energy investment trust sector, with a difficult macro environment, a volatile regulatory landscape and frustrating share price performance.”
In another setback, the company said it had “paused” the sale of its Australian assets having received a small number of bids, none of which were deemed deliverable.
Its estimates for the impact of the government’s two proposals for switching rises in ROC and FIT payments from RPI to CPI inflation were also worse than expected. While the first option of a simple switch from one measure to another in March would reduce NAV per share by just 1.7p or 1.6%, the more “aggressive” idea of freezing indexation until the mid-2030s when the two measures aligned would knock 10.4p or 10.2% off the valuation. This is similar to Bluefield Solar’s assessment.
Foresight Solar said it was “disappointed” by the proposals saying the inflation linkage in ROC and FIT schemes was a core part of the investment case for many UK renewable energy projects. “The board will urge the government to carefully assess the likely impact of these proposed changes on investor confidence,” it said.
Our view
James Carthew, head of investment company research at QuotedData, said: “Foresight Solar’s estimate of the NAV hit from option 2 of the UK’s proposed changes to subsidies is over 10%. I’d reiterate the call to tell the government what you think of this. The tax review hit is a real surprise to us, hopefully this problem is unique to this trust.”
