US Solar Fund (USF)

26/09/2022

Results analysis from Kepler Trust Intelligence

USF's unaudited NAV at 30 June 2022 was $0.967 per Ordinary Share, very marginally higher than the 31 March NAV. A small uplift in electricity price forecasts, improved operating cost assumptions, and valuation date roll forward drove the increase in fair value of the portfolio's underlying solar investments. As at 30/06/2022, the weighted average discount rate range used was 6.7% (December 2021: 6.3%) on a WACC basis, and 7.6% (December 2021: 7.8%) on a pre-tax cost of equity basis.

The company has continued to deliver and cash cover the target dividend, with an increase in the dividend of 1.5% in 2022 (USF's second full year of operations) to 5.58 cents. USF's NAV total return from inception to 30/06/2022 including dividends paid is 7.8% in dollar terms. In contrast, including dividends paid and reinvested, the share price total return (in dollars) from inception to 30/06/2022 is -4.06%, largely due to the discount widening since listing. 

The board recognize the share price performance has been disappointing compared to peers who have a greater exposure to merchant power prices than USF. Therefore, the board and the investment manager are exploring options to deliver value for the shareholders.

Kepler View

As at 30/06/2022, US Solar Fund (USF's) portfolio consisted of 42 projects across four US states with a combined capacity of 543MWDC. These assets are fully operational, having generated 452 gigawatt-hours (GWh) over the six-month period to 30/06/2022. Power offtake agreements are in place for 100% of generation with creditworthy counterparties with a weighted average remaining life of 14.3 years, providing a resilient and uncorrelated income stream. This solid income stream underpins the dividend, and is the chief attraction of USF in our view. The current target dividend of 5.58 cents represents a yield at the current share price (US$ 0.87 as at 26/09/2022) of 6.4%.

USF's shares trade at a discount to NAV of 10%. In our view, this reflects current market sentiment, which currently favours those peers with exposure to power prices, and/or inflation linkage. USF's PPA's do not contain direct inflation linkages (which are not common in the US), although it is worth noting that some of the contracts escalate at a specified percentage annually.

The current discount to NAV could offer value in a sector where premiums are currently the norm. A catalyst for this discount to close, could come in the form of the forthcoming announcement on the board and the managers exploration of "options to continue to deliver value".

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