Trading at a c.18% discount to NAV (an implied asset level discount rate of c.10.2%pa), Foresight Solar (FSFL) is undervalued relative to other renewable generators, its own trading history and other long-duration assets. In our opinion, the key risk is investors’ required risk premium (spread over gilts). In light of the fund’s self-help measures (paying down the RCF, rotating in to higher returning assets and buying shares) and sensitivity analysis we believe the market has, by pricing at an asset level discount rates of 10.2% (a spread over treasuries of c570bps), overcorrected. We believe this has created an opportunity to invest in an asset with inflation linked income streams (40-50% of total revenue, lasting for the next c. 12 years) that has been partially financed by fixed rate, mainly amortising, debt at a low average interest rate (mainly sub c.3.5%). As FSFL executes on its plans, we expect the market to reengage and the fund to re-rate. Until this occurs, investors are being paid well (7.8% yield, 1.5x plus covered, progressive, dividend) to wait.
