Should you buy energy infrastructure investment trusts?

The listed infrastructure investment trust sector offers some extraordinary bargains. Infrastructure investment trusts are trading at an average discount to net asset value (NAV) of 22%. Renewable energy infrastructure investment trusts are trading at an average discount of closer to 30%. The reason for these discounts is uncertainty. NAVs are based on estimated cash flows from the assets these trusts own, discounted back at an appropriate rate. 

Discount rates are tied to interest rates and the higher the discount rate, the lower the present value of future cash flows, and vice versa. However, these values are open to interpretation, and at present the market doesn’t appear to believe the values the trusts are reporting – hence the wide discounts to NAVs across the board. 

In some cases, I think the market is right to be sceptical but, in others, there is clear evidence that investors are being too pessimistic when it comes to asset values. Bluefield Solar Income Fund (LSE: BSIF) appears to be a classic example. The company boasts a portfolio of solar and wind assets, comprising a total of 776 megawatts (MW) of solar and 58MW of onshore wind capacity, with its assets located in the UK. A current dividend yield of 8.1% is on offer and the payout is covered twice by earnings per share.

MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Bluefield Solar: a shining energy infrastructure investment trust

There are two technical reasons why investors might be put off from holding the trust. One is regulatory. Last month 360 Fund Insight, which provides assessments of value for investment platform AJ Bell, found that Bluefield Solar is not appropriate for private investors because it has “worrisome” borrowing levels and an “aggressive” dividend policy. 

The other reason is investors’ appetite for risk. As Armstrong notes, “there isn’t the appetite for new investments” in the infrastructure investment trust sector. In a market where investors can earn 5.25% risk-free and have been fleeing from all UK-listed equities for more than two years, these trusts can’t even get a look-in from investors. 

Still, there is an excellent opportunity here for investors willing to be patient and go against the herd. Based on the discount and the current dividend yield, investors could earn a very healthy return if the discount closes. That could take some time, but in the meantime the firm is buying back stock, and with the private market still willing to pay up for solar assets, sooner or later, if Bluefield keeps booking record earnings and returning more cash to its investors, a private buyer is likely to come knocking.

Risks associated with this energy infrastructure investment trust

There are two technical reasons why investors might be put off from holding the trust. One is regulatory. Last month 360 Fund Insight, which provides assessments of value for investment platform AJ Bell, found that Bluefield Solar is not appropriate for private investors because it has “worrisome” borrowing levels and an “aggressive” dividend policy. 

The other reason is investors’ appetite for risk. As Armstrong notes, “there isn’t the appetite for new investments” in the infrastructure investment trust sector. In a market where investors can earn 5.25% risk-free and have been fleeing from all UK-listed equities for more than two years, these trusts can’t even get a look-in from investors. 

Still, there is an excellent opportunity here for investors willing to be patient and go against the herd. Based on the discount and the current dividend yield, investors could earn a very healthy return if the discount closes. That could take some time, but in the meantime the firm is buying back stock and with the private market still willing to pay up for solar assets, sooner or later, if Bluefield keeps booking record earnings and returning more cash to its investors, a private buyer is likely to come knocking.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.