Foresight Sustainable Forestry 27 January 2023

Foresight Sustainable Forestry (LON:FSF) is a unique investment proposition. A key part of the strategy is to invest in afforestation projects: that is to buy land with a lower-valued use and convert it to more valuable forested land. As permissions are granted and planting completed, this can lead to significant uplifts in the value of the land. In the company’s first year or so of existence, this has been demonstrated (see Performance), notably with the Mountmill Burn afforestation site, which has been written up by 97% from its acquisition price.

Afforestation permanently takes carbon dioxide out of the atmosphere, which means the company has a clear appeal from a sustainability perspective. Additionally, there is a nascent market in voluntary carbon credits, which FSF is earning through sequestering additional carbon from the atmosphere. The intention is to hold these on the balance sheet until around 2030, during which time the managers expect their value to grow considerably (although there are clearly no guarantees). The plan is to distribute them as dividends (for those investors who optionally elect to receive them in specie), which could in the future have strong appeal to investors looking to offset their carbon emissions – particularly large corporates, as we discuss under ESG.

FSF is managed by Robert Guest and Richard Kelly of Foresight Group. In addition to afforestation sites, FSF invests in mature forestry, which brings exposure to the price of forested land and revenues from timber. Robert and Richard believe there are strong fundamentals for timber over the medium to long-term, with global demand expected to soar and supply lagging – particularly of high-quality certified timber.

FSF does not pay a regular dividend, and timber revenues are expected to offset costs, along with a recently-arranged and hitherto undrawn revolving credit facility (see Gearing).

An exciting moment last year came when FSF was the first company to win the LSE’s Voluntary Carbon Market (VCM) designation, which puts it at the lead in the early stages of the market for voluntary carbon credits. With large corporates increasingly committing themselves to net zero, the potential demand for carbon credits is huge and being LSE-certified means FSF can claim the highest levels of oversight and verification. Depending on how the market develops, there could be strong potential upside for FSF through its ability to generate these carbon credits over the next few years. If Robert and Richard are right about the potential in this market, carbon credits could grow to be a significant part of the NAV over time although we would stress that this is not yet an established market. In the future, FSF has the ability to pay these credits as a dividend, and this could come to appeal to corporate investors with ongoing operations that emit carbon, meaning the market for the shares in FSF could grow considerably over time.

All of this is for the long term, and there are risks the market won’t develop as hoped. In the meantime, however, FSF has intriguing financial and sustainability attractions. The value that the managers have demonstrated they can unlock through finding good locations and completing the afforestation process is notable, and recent announcements of milestones achieved at a number of projects could see valuation uplifts in the upcoming NAVs. Additionally, the long-term supply and demand mismatch in the timber market is interesting, and could be a secular driver of returns. On the other hand, it remains to be seen if timber and timber-producing land will be impacted by a recession such as the one expected in 2023.