Ian Cowie: why this investment trust discount looks a bargain

Our columnist reports on a potential catalyst that could see the double-digit discount for one of his holdings narrow towards the value of its underlying investments.

Double-digit discounts are, er, ten a penny in the investment trust sector these days. But ‘crystallisation events’ - or reasons to expect the share price to converge with net asset value (NAV) - are harder to find.

So I am glad to report that one of my renewable energy investment trusts, whose shares are currently trading nearly 14% below their NAV, seems set to enjoy just such an upward transformation soon. Better still, while we wait to find out whether this ‘cheque in the post’ will ever arrive, a 6.7% dividend yield pays me to be patient.

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Step forward, sterling-denominated shares in the self-descriptive US Solar Fund (LSE:USF). Total assets of $319 million (£266 million) are invested in 42 solar farms spread across the sun-kissed states of California, North Carolina, Oregon and Utah.

Bear in mind that US president Joe Biden recently succeeded in getting the US government to agree a $369 billion package of incentives to boost renewable energy. This unprecedented initiative is somewhat confusingly called the Inflation Reduction Act (IRA), on the basis that making more of their own green power should reduce America’s reliance on fossil fuels, whose prices spiked after Russia invaded Ukraine last February.

Here and now, with a following wind like that, you might be forgiven for thinking USFP should be making hay while the sun shines. But shares I bought for 79p each in November 2020, cost only 70p this week.

What went wrong? Part of the problem involved getting funds raised during the initial public offering (IPO) in April 2019, invested in revenue-raising assets. As discussed here last week, with reference to another relatively newish investment trust, putting IPO cash to work can take longer than expected.

I also seem to have over-estimated the impact of senior board members in driving this project forwards. Non-executive chairman Gillian Nott has an impressive background in the energy sector with the oil giant BP, while another non-executive director or Neddy, Rachael Nutter, led global solar business development for that other great British oil giant, Shell.

Sad to say, even such relevant expertise seems to have exerted limited uplift on USFP’s share price. Perhaps it is just as well for its four directors that none of them has used as much as one year’s fees paid by this company to invest in its shares, although three of them have been on the board since 2019, according to research by Investec.

That’s cold comfort to this small shareholder who seems to have more invested in USFP than half the board, if Investec’s numbers are right. It is wrong to wish for an equality of misery but if the directors had more ‘skin in the game’ perhaps they could at least share investors’ pain.

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On a happier note, USF - or the dollar-denominated sibling of USFP - has announced that a business formerly known as Goldman Sachs Renewable Power has exercised its $1m non-refundable option to buy half of a 200 Megawatt (MW) solar site for $52.5m. The Goldmans vehicle is now known as MN8 Energy or MN8 and the site being sold by USF/USFP is called Mount Signal 2 or MS2.

Before your eyes glaze over, let me explain the significance of this deal. The announcement adds: “USF’s total proceeds of $53.2 million are consistent with the last published net asset value for MS2 prior to the grant of the option.

“The MS2 sale will imply a gross return of approximately 11% per annum since USF announced the agreement to acquire up to 50% of MS2 from New Energy Solar in December 2020.”

Now bear in mind that this development follows USF’s announcement last October of a “strategic review” that might involve selling the business and returning cash to shareholders.

More formally, it said: “Since IPO, US Solar Fund (LON:USF (USD)/USFP (GBP) has successfully executed its strategy of delivering a sustainable dividend for shareholders.

“However, structural challenges in the US solar sector alongside a recent sustained discount of the share price to its net asset value have impeded the company's ability to grow its asset base…and it has taken the decision to consider all potential strategic options to maximise shareholder value.

“The board will consider all options including, but not limited to, a sale of the entire issued share capital of the company and returning funds to shareholders.”

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So the significance of Goldmans paying $1 million for a non-refundable option to buy a $52.5m site at NAV from USFP, is that it raises the potential for the rest of this business to also be sold at NAV.

As mentioned earlier, Biden’s $369 billion IRA sweetens the mood music.

To be fair, USF’s 23 January announcement ended with this statement: “USF expects to execute binding sale documents in the first quarter of 2023, with financial close in the second quarter of 2023 subject to customary regulatory and financier consents.

“The option exercise and expected resultant MS2 sale has no impact on the strategic review and formal sale process announced on 17 October 2022.”

How much wishful thinking is there in this small shareholder’s hope that USFP might close its 14% discount and buy us all out at NAV? Well, it rather looks as if we won’t have to wait long to find out.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in the sterling-denominated shares of US Solar Fund (USFP) as part of a globally diversified portfolio of investment trusts and other shares.