The Holy Grail for investors is long-term predictable income allied to capital growth potential.
Many businesses try, but few can demonstrably deliver year after year.
With a track record that spans more than a decade, Foresight Environmental Infrastructure (LSE:FGEN), or FGEN for short, appears to fit the bill.
But, as we’ll see as we dig deeper, there’s an added dimension.
There’s a value argument that will definitely appeal to Ben Graham and Warren Buffett disciples.
Before we get into the investment metrics, it’s worth understanding what FGEN is and does, and why it is definitively different to the solar and wind funds that have struggled of late.
Launched in 2014, FGEN invests across renewable energy generation, other energy infrastructure and sustainable resource management, from wind farms and anaerobic digestion plants to battery storage and waste treatment.
Three pillars
It calls this its ‘three pillars’ strategy and it means the group isn’t hemmed into low-carbon electricity generation. Rather, it can target a wider range of environmental opportunities.
The common thread is reliability. About 61% of its revenues come from government-backed subsidies and long-term contracts, helping to underpin a dividend that has risen every year since inception.
June’s “strategic refresh”, as management calls it, means FGEN will hone in on mature, income-producing assets such as solar, wind and biomass, where revenues are visible and secure.
It will also look to sell some of its growth projects once they are fully operational and valued appropriately. These include investments in a Glasshouse facility growing highly regulated medicinal cannabis, a land-based trout farm in Rjukan, Norway, as well as a low-carbon transportation refuelling hub, CNG Fuels.
All three are now well into their ramp-up phase, and their eventual sale should release capital in the next two to three years for reinvestment or balance-sheet strengthening.
Addition by subtraction
It should be noted that the £88.6 million raised through the sale of 10% of the portfolio at or above NAV over the past year has allowed FGEN to reduce debt and extend its share buyback programme materially.
It’s a pragmatic move after a tough couple of years. Higher interest rates did not help either: they pushed up discount rates used to value assets, leaving shares across the sector trading at steep discounts to net asset value.
FGEN’s own discount hit more than 40% late last year but has since narrowed to about 30%.
Operationally, though, things look sound. Cash distributions from its projects hit a record £90.4 million in the year to March 2025, the tenth straight annual increase, giving dividend cover of 1.3 times.
The trust’s £420 million market capitalisation sits atop a portfolio of 40 projects, 89% of them in the UK, with an average remaining life of more than 16 years.
Innovation
The reset doesn’t mean abandoning innovation. FGEN still plans to keep around 15% of its capital in development and construction-stage assets, but only in proven technologies with clear regulatory frameworks.
So, as mentioned above, there is the potential to generate capital growth from development. That’s not just greenfield; FGEN has a track record of taking existing assets from modest beginnings and building them over time.
A case in point is the Cramlington biomass facility in Northumberland, which was bought out of administration and now generates an internal rate of return of nearly 30%. In other words, it’s averaged roughly 30p a year for every £1 originally invested, a remarkably strong turnaround.
Not mentioned so far is an extremely strong acquisition pipeline. So, when it has cash to recycle it can tap into around 1,000 opportunities. And, given expertise in-house, both at FGEN and within the wider Foresight group, you’d assume the management is able to pick off top-tier, long-term winners.
Payout well-covered
Now back to an item mentioned earlier – the dividend cover, which at 1.3 times is among the best in the sector.
It should be pointed out that the figure is calculated post-debt amortisation. That’s a fancy way of saying it is an extremely conservative calculation of FGEN’s ability to pay shareholders, and not a benchmark universally adhered to by some competitors; so be aware when screening opportunities in the sector.
When you assess the cover, you also have to bear in mind that around 15% of the portfolio is either pre-revenue or so commercially early-stage that the financial contribution is de minimis.
Or to flip that, the very healthy figure quoted is being generated by just 85% of FGEN’s asset base. This is a point worth remembering. Its commitment to growth is not impeding income generation.
When doing your tyre kicking, it is well worth looking at the balance sheet, where gearing stands at a relatively modest 30%.
Now, some cautionaries: I can only tell the story as relayed: speaking to management, poring through the fund information and tapping into the paid research.
Do your homework
So, I would urge you to carry out your own due diligence.
It is also worth mentioning that, while the long-term outlook for environmental infrastructure is underpinned by the move to electrification and the wider energy transition, there are always potholes.
Some of the deepest of these vehicular hazards have been seen in the past three and a half years and could not have been predicted by economists or analysts.
A war on Western Europe’s doorstep (Ukraine) led to higher inflation and interest rates that have directly and negatively impacted valuations (via inflated discount rates) and dented investor appetite.
And the fall-out is still being acutely felt across the sector.
Ready for a reset?
I mention this not as a painful rehash of recent history, but to illustrate that, in this era of trade hostilities and escalating global tensions, geopolitics has an impact on companies such as FGEN.
That said, once a more normal pattern emerges (ie as interest rates and inflation begin to recede), the discount to net asset value, currently around 30% should unwind.
So, an asset bought for 70p in the pound ought to naturally gravitate towards parity. And this should speak to the value investors. In the meantime, there is a healthy near-12% dividend yield to cushion the blow.