Foresight Sustain. - Interim Results to 31 March 2023
13/06/2023 07:00
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RNS Number : 4721C Foresight Sustain. Forestry Co PLC 13 June 2023
13 June 2023
Foresight Sustainable Forestry Company Plc
Announcement of half-year results for the period to 31 March 2023
Foresight Sustainable Forestry Company Plc ("FSF" or "the Company"), an
investment company that invests in UK forestry and afforestation assets, is
pleased to announce the publication of its unaudited Interim Results (the
"Interim Results") for the period from 30 September 2022 to 31 March 2023.
Financial Highlights
- The Company recorded a Profit for the period of £6.0 million
(31 March 2022: £7.9 million).
- Net Asset Value ("NAV") has increased to £186.6 million (30
September 2022: £180.6 million).
- NAV per Ordinary Share has increased to 108.5 pence, a NAV per
share return of 3.3% since 30 September 2022.
- The Company has delivered a total NAV return of 10.6%¹ since
IPO.
- The key drivers of the uplift are the upwards revaluation of
FSF's properties (+5.1p) and carbon credit creation (+1.1p), driven by
mark-to-market valuation gains on recently acquired properties and the
completion of planting c.955,000 trees at four afforestation properties.
- As at 31 March 2023, the Company had £1.6 million of cash
available and a £30.0 million of additional available liquidity in its RCF
facility.
Key Metrics
As at 31 March 2023
Net Asset Value £186.6 million
NAV per Share 108.5 pence
Total NAV return since IPO ¹ 10.6%
Profit/(loss) for the period £6.0 million
¹ Calculated with IPO costs netted off
Summary of NAV key drivers from 30 September 2022 to 31 March 2023:
Item p/share movement
NAV at 30 September 2022 105.0
Tax and transaction costs on acquisitions (0.9)
Operational expenditure (1.0)
Afforestation & restock costs (0.8)
Portfolio revaluation gains 5.1
Voluntary carbon credit valuation gains 1.1
NAV at 31 March 2023 108.5
Portfolio and Operational Highlights
- FSF acquired 15 properties in the period, leading to a total
portfolio of 65 individual properties at 31 March 2023.
- Of the total portfolio, 42% are established forestry properties,
42% are afforestation properties and 16% are mixed properties (by value).
- FSF now has six planted afforestation assets with a further 34
properties with afforestation potential being developed in its portfolio.
- Once planted, FSF's afforestation portfolio will further create
more than 35 full-time equivalent employment opportunities, on average over
each 40-year rotation, to manage these properties.
- The majority of the current timber harvesting programme remains
on hold with the Company opting instead for biological growth of its timber
stock. The Company has elected to leave c.117,000 tonnes of mature timber
'on-the-stump' and will continue to monitor timber pricing and bring more
substantial volumes to market when trading conditions are more favourable.
Sustainability and ESG
- FSF's current afforestation portfolio in on track to see 4,120
hectares of land planted with trees, equivalent to approximately a third of
the total area (c.13,840 hectares) that was planted with trees across the UK
in FY 21/22.
- The Company's current afforestation portfolio will create c.700
regional employment opportunities to get all projects planted, requiring
c.11,000 person-days of combined effort, equivalent to more than 50
person-years of work.
Results presentation
The Company will host a virtual SparkLive presentation at 9:30 a.m. (UK time)
this morning. To register your interest in attending the presentation, please
click here
(https://www.lsegissuerservices.com/spark/FORESIGHTSUSTAINABLEFORESTRYCOMPANY/events/6ae6ff6a-ad0a-487a-8d13-6fda77b12ff2)
.
Analyst presentation
The Company will host a webinar for analysts at 10.30 a.m. (UK time) this
morning. To register your interest in attending the presentation, please email
FSF@SecNewgate.co.uk (mailto:FSF@SecNewgate.co.uk) .
Richard Davidson, Chair of Foresight Sustainable Forestry Company Plc,
commented:
"Today's results confirm the positive NAV progression during the period,
demonstrating the ability of our business to deliver value growth during
volatile macroeconomic conditions. This is very pleasing, and the upward
revaluation gains in our portfolio, particularly in the afforestation segment,
have been instrumental in this achievement. The successful completion of
planting approximately 955,000 trees has not only enhanced our NAV
substantially, but has also created a significant number of employment
opportunities for communities while facilitating additional carbon
sequestration to help combat fossil fuel driven climate change.
We are also very pleased that the value of the Company's voluntary carbon
portfolio has continued to increase, with £2.5 million included in our NAV.
With our growing afforestation asset base and the increasing demand for high
integrity carbon credits, this places us in a strong position to deliver
further meaningful returns to our valued shareholders.
Tree planting is a core pillar of the UK Government's Net Zero strategy, and
we are leading facilitators of this, committed to achieving this
transparently, in a way which delivers long-term value to investors,
increasing the UK's supply of sustainable timber and positively contributing
to the Just Transition."
For further information, please contact:
Foresight Sustainable Forestry Company Plc +44 20 3667 8100
Robert Guest
Richard Kelly
fsfc@foresightgroup.eu
Jefferies International Limited +44 20 7029 8000
Tom Yeadon
Will Soutar
Harry Randall
SEC Newgate
Elisabeth Cowell
fsf@secnewgate.co.uk
About the Company
Foresight Sustainable Forestry Company Plc ("the Company") is an externally
managed investment company investing in a diversified portfolio of UK forestry
and afforestation assets. Targeting a net total return of more than CPI
(5-year average) +5%, the Company provides investors with the opportunity for
real returns and capital appreciation driven by the prevailing global
imbalance between supply and demand for timber; the inflation-protection
qualities of UK land freeholds; and biological tree growth of 3% to 4% not
correlated to financial markets. It also offers outstanding sustainability and
ESG attributes and access to carbon units related to carbon sequestration from
new afforestation planting. The Company targets value creation as the
afforestation projects successfully achieve development milestones in the
process of converting open ground into established commercial forest and
woodland areas. The Company is seeking to make a direct contribution in the
fight against climate change through forestry and afforestation carbon
sequestration initiatives and to preserve and proactively enhance natural
capital and biodiversity across its portfolio. It is managed by Foresight
Group LLP. https://fsfc.foresightgroup.eu/ (https://fsfc.foresightgroup.eu/)
This announcement does not constitute, and may not be construed as, an offer
to sell or an invitation to purchase investments of any description, or the
provision of investment advice by any party. No information set out in this
announcement is intended to form the basis of any contract of sale, investment
decision or any decision to purchase securities in the Company.
This announcement may include statements that are, or may be deemed to be,
"forward-looking statements". These forward-looking statements can be
identified by the use of forward-looking terminology, including the terms
"believes", "estimates", "anticipates", "expects", "intends", "may", "will",
"targeting" or "should" or, in each case, their negative or other variations
or comparable terminology. All statements other than statements of historical
facts included in this announcement, including, without limitation, those
regarding the Company's financial position, strategy, plans, proposed
acquisitions and objectives, are forward-looking statements.
ABOUT US
Foresight Sustainable Forestry Company Plc ("FSF", the "Fund" or the
"Company") is the first and only UK listed investment trust focused on UK
forestry, afforestation and natural capital. FSF was awarded the London Stock
Exchange's Green Economy Mark at IPO. In December 2022, FSF became the first
fund to be accredited with the London Stock Exchange's Voluntary Carbon Market
designation.
FSF aims to generate sustainable financial returns for its Shareholders
through investing in a diversified portfolio of UK forestry and afforestation
assets.
INVESTMENT OBJECTIVES
Real returns and capital appreciation Value creation through afforestation Sustainable timber supply Combat climate change and biodiversity loss Access to voluntary carbon units
HIGHLIGHTS
AS AT 31 MARCH 2023
£186.6m 117,000 tonnes
NET ASSET VALUE ("NAV")(1) Timber under consideration for harvesting in 2023
(30 September 2022: £180.6m) (30 September 2022: 26,000 tonnes)
10.6% 4,120 hectares
TOTAL NAV RETURN SINCE IPO(1) Land newly planted or in afforestation development
(30 September 2022: 7.0%)(2) (30 September 2022: 3,917 hectares)
108.5p c.955,000
NAV Per share(1) Trees planted this year
(30 September 2022: 105.0p) (30 September 2022: c.514,000)
11,743 hectares £2.5m
IN THE PORTFOLIO Value ascribed to progress towards creation of carbon credits
(30 September 2022: 9,618 hectares) (30 September 2022: £0.6m)
1. Alternative Performance Measures ("APMs") have been included to better
reflect the Group's underlying activities.
Whilst appreciating that APMs are not considered to be a substitute for,
or superior to, IFRS measures, the Company believes their selected use may
provide stakeholders with additional information, which will assist in their
understanding of the business. Further information is available on page 33.
2. Calculated with IPO costs netted off, see page 33 of APMs for more
information.
GEOGRAPHIC FOOTPRINT
A diversified portfolio of UK forestry and afforestation assets
65 properties
1 Fordie Estate
2 Whiteburn
3 Lambs Craig
4 Shorthope
5 Aberarder
6 Frongoch
7 Brynglas
8 Esgair Hir
9 East Browncastle
10 Berrieswalls
11 Barkip
12 Over Auchentiber
13 Crofthead
14 Coull
15 Auchensoul
16 Upper Barr
17 Bogforlea
18 Harthills
19 Kirkwood
20 Tom Na Wan
21 Rorie Hill
22 Waterhead and Craigenputtock
23 Camps Woodlands
24 Banc Farm
25 Glass Rigg
26 Mountmill Burn
27 Nor Hill
28 Cwmban Fawr Farm
29 Drumelzie
30 Waun Maenllyd
31 South Dairy
32 Derry Lodge
33 Bronnant
34 Craigwell Wood
35 Maescastell
36 Pistyll South
37 Red Craig & Glen Burn
38 Burn of Bellyhack
39 Dove Hill
40 Drove Road
41 Chatto Craigs
42 Coed Doethie
43 Piltanton Wood
44 Brown Hill
45 Ness Bogie
46 Reams Hill
47 Knock Fell
48 Cheterknowes Wood
49 Windylaws
50 Liddel Water
51 Bogbain Wood
52 Glendyne Wood
53 Bruntaburn Forest
54 Goukstane Wood
55 Cessnock Wood
56 Redding Farm
57 Allanton Farm
58 Newnoth Forest
59 Coed Y Garreg
60 Knocktail Wood
61 Bedehouse & East Bennachie
62 Highside Wood
63 High Auldgirth
64 Newnoth Farm
65 Balnagowan
CHAIR'S STATEMENT
FSF's strategy has delivered resilient NAV progression during the period,
despite volatile macroeconomic conditions.
Richard Davidson
Chair
Introduction
On behalf of the Board, I am pleased to present the Unaudited Interim Report
and Financial Statements for Foresight Sustainable Forestry Company Plc
("FSF", the "Company" or the "Fund") for the period ended 31 March 2023.
The Company has had an encouraging first half of the year, delivering an
increased Net Asset Value ("NAV"), progressing on four new planting schemes
and fully deploying the equity proceeds from our June 2022 fundraise while
buying 15 new properties.
In December 2022, FSF also became the first company to be awarded the London
Stock Exchange's new Voluntary Carbon Market designation. This is a
designation that recognises funds that have invested in carbon credit projects
that meet internationally recognised standards.
FSF's share price has reflected the momentum in the business by, for the most
part, trading at, or above, NAV through the half-year period. This is despite
the investment trust sector, as a whole, trading on close to all time record
discounts to NAV. Whilst exhibiting low volatility through the six months, our
share price closed at 108.0 pence on 31 March 2023.
Key financials
In the six months to 31 March 2023, our NAV increased by £6.0 million to
£186.6 million (30 September 2022: £180.6 million) and NAV per Ordinary
Share increased to 108.5 pence (30 September 2022: 105.0 pence). The key
driver of this gain was the 7.4% upwards revaluation of our portfolio of
afforestation sites. This figure was largely influenced by a combination of
capital appreciation from the completion of planting at four of our
afforestation properties, and mark‑to‑market gains on the 15 properties
acquired in the period.
Acquisitions and capital deployment
During the period, the Company deployed a further c.£30 million(1) into 15
acquisitions. Of these properties, ten were afforestation, three were forestry
and two were mixed.
FSF remains focused on its process of acquiring and owning high-quality
afforestation and established forestry properties. Given the higher interest
rate and tougher asset market environments in 2022, the Managers have been
highly selective on the quality and pricing of additional acquisitions through
the six month period.
While we have now deployed the proceeds of our most recent equity fundraise,
we remain in acquisition mode as the Company's Revolving Credit Facility
("RCF") remains undrawn and available. Our ambition remains to grow FSF, and
we continue to pursue a pipeline of attractive NAV accretive investment
opportunities.
Forest operations
It has been a busy and productive period for operations across the portfolio.
Operational efforts have been focused on completing the planting of nearly one
million trees across four woodland creation schemes, and taking the total
number of planted afforestation properties in the portfolio to six. Overall,
690 hectares(2) of the portfolio now sits in our Establishment Stage
Afforestation category. The four newly planted (spring 2023) properties are
forecast to produce an estimated 190,500 tonnes of sustainable timber (for
each c.35‑40-year rotation), contributing to domestic timber security and
the removal of atmospheric carbon dioxide while aligning with both regional
and national tree planting strategies.
(1) Inclusive of tax and transaction costs.
(2) Full breakdown of the portfolio is included on page 17 and 18.
The engine room of FSF's returns is expected to remain the successful
development of woodland creation schemes as has been seen on the six
afforestation properties that have been planted to date. FSF has 34 further
afforestation properties in the portfolio that remain on track to be planted
in the spring of 2024 and 2025.
Things have been quieter on the harvesting side due to softer timber prices.
For the period, FSF harvested and sold 6,400 tonnes of timber. The Company
elected to leave c.117,000 tonnes of mature timber biologically growing
"on‑the‑stump" and will bring that and more substantial volumes to market
when trading conditions are more favourable.
Voluntary Carbon Market Designation
In December, FSF became the first ever company to receive the London Stock
Exchange's newly created Voluntary Carbon Market designation. The designation
is aimed at enabling companies with net zero pledges to invest in investment
companies, like FSF, that are investing in projects that will create and
distribute high-integrity voluntary carbon credits. The carbon credits can
ultimately be used by these companies, alongside efforts to reduce emissions,
to offset the final 5-10% of unavoidable emissions to achieve net zero. A more
detailed description of the voluntary carbon credits markets can be found on
pages 14 to 16 in the Investment Manager's report.
The Board's plan remains for the Company to distribute carbon credits, for
those investors who elect, as in‑specie dividends from 2030 onwards. For
those who elect not to receive in-specie, the Company will sell the carbon
units on their behalf and distribute the proceeds in cash.
Sustainability
A post-period event, but one we are especially proud of, is the publication of
the Company's first dedicated Sustainability & Environmental, Social and
Governance ("S&ESG") report in April 2023. The report outlines the
Company's sustainability vision and provides Shareholders with an update on
the Company's delivery against its Key Sustainability and ESG objectives (over
the period ended 30 September 2022), as well as explaining the natural capital
land management approach that the Company is applying with a view to
generating natural capital alpha. The report is available on the Company's
website(3).
Of particular note is the additional work that the Company is doing in respect
of community engagement with local stakeholders on planting plans and the
successful completion of year one of FSF's Forestry Skills Training Programme.
The Company aims to be a progressive industry leader and an advocate for
sustainable land-use design.
(3) FSF Sustainability and ESG Report 2022:
https://media.umbraco.io/foresight/ar0gzg2h/sustainability-and-esg-report-2022.pdf
Market outlook for FSF's key markets
Despite sharp rises in interest rates and falling equity and real estate
prices in 2022, our Managers have observed good evidence that indicates that
the investment market for forestry assets and FSF's strategy will remain
resilient. Underpinning this resilience are three characteristics. First, UK
forest owners tend not to use structural leverage, meaning forest property
prices are to some extent insulated from rising interest rates. Second,
UK forest owners enjoy a five to ten year harvesting window on mature trees,
meaning less impact from short-term timber price volatility. Proactive
decisions can be made to not cut and instead leave maturing timber
"on‑the-stump"
to add biomass and value during times of softer timber prices. Finally,
the global sustainable timber supply deficit is widely expected to continue
to expand. Whilst the UK is waking up to the importance of increased domestic
timber security, trees, by their nature, will take 35-40 years until they will
reach harvesting maturity.
In the short term, domestic demand for sustainable timber is expected to
remain subdued. Domestic construction demand is forecast by the Construction
Products Association ("CPA") to be down by c.5% in 2023, versus 2022, impacted
by a combination of high inflation and high interest rates.
On the supply side, with most storm damaged timber now processed through
supply chains, inventories are back to more normal levels. Over the long term,
the uneven age profile of commercial forests in the UK means that annual
softwood supply is forecast by Forest Research to peak in the 2030s and then
decline by c.45% by 2050. Over the long term, in the UK, demand for
sustainable timber is expected to almost double by 2050, according
to industry body Confor.
It also remains important to note that the UK imports c.80% of all timber
consumed, and of these imports 63% are softwood, so international dynamics
remain an important factor in determining UK conditions. The ongoing Russian
war in Ukraine means all timber originating from Ukraine, Russia and Belarus
is deemed conflict timber and cannot be certified as sustainable for the
duration of the conflict. Pre‑invasion, Russia, Belarus and Ukraine
accounted for c.20% of the global timber trade.
The demand outlook internationally has improved during the reporting period.
The Inflation Reduction Act ("IRA") in the US is expected to materially
increase US timber demand. There is early anecdotal evidence that increasing
volumes of European timber are being exported to the US to fulfil this growing
demand. The demand outlook in China has also improved following the lifting of
zero-Covid policies and the implementation of a substantial rescue plan for
its indebted property developers.
Finally, with the rest of Europe enjoying a slightly softer landing than the
UK, the demand for sustainable timber has been slightly more resilient in
Europe than in the UK. However, the long-term demand outlook for sustainable
timber in both the UK and Europe remains positive and underpinned by the
prevailing decarbonisation agenda.
Conclusion
As we embark on the next six months, the Company is well positioned to
leverage a range of environmental tailwinds whilst it continues to deliver on
its business objectives. I am pleased with the trajectory that the Company has
maintained over the six months to 31 March 2023 and would like to thank our
Shareholders, my fellow Board members and the Fund Managers for their
dedication to the Company's successful growth.
Richard Davidson
Chair
12 June 2023
INVESTMENT MANAGER'S REPORT
We are pleased to have fully deployed FSF's equity in a NAV accretive manner,
whilst simultaneously delivering strong capital appreciation by successfully
planting four afforestation schemes in the period.
Robert Guest
Managing Director, Foresight Group, Co-lead Manager of FSF
Richard Kelly
Managing Director, Foresight Group, Co-lead Manager of FSF
Executive summary
During the last six-month reporting period, the Company has been intensely
focused on a combination of disciplined capital deployment and afforestation
development activity. The period has seen FSF's portfolio deliver strong
returns on both the afforestation and standing forestry components, with both
outperforming in an otherwise flat market. Whilst the economic backdrop has
been highly uncertain and volatile during this challenging time for investors,
we are encouraged to see the resilience of FSF's NAV progression and share
price for our investors and stakeholders.
Key Performance Metrics
Key investment metrics for the period ended 31 March 2023
As at As at
All amounts presented in 31 March 30 September
£million (except as noted) 2023 2022
Market capitalisation 185.8 182.4
Share price 108.0p 106.0p
Gross Asset Value ("GAV") 186.6 180.6
Total NAV return from IPO¹ 10.6% 7.0%
Net Asset Value ("NAV") 186.6 180.6
NAV per share 108.5p 105.0p
Profit before tax for the period 6.0 8.8
The purpose and calculation methodology of the key APMs are shown on page 33.
(1) Calculated with IPO costs netted off, see page 33 of APMs for more
information.
Acquisitions
FSF started the period with approximately £30.0 million of cash available
for further acquisitions, which remained from the £45 million equity placing
that took place in June 2022. We were pleased to report in January 2023 that
FSF had successfully acquired 12 properties in the period which saw the June
2022 equity proceeds fully deployed, ahead of the six-month target committed
to participating investors. On 30 March 2023, the Company acquired a further
three properties for a total consideration of £9.9 million. These
acquisitions were funded from cash and not the Revolving Credit Facility
("RCF"), although the Company expects to draw on the facility in the second
half of the year for planned capital expenditure. The Company's intention is
to minimise exposure to interest charges whilst retaining a sufficient cash
buffer.
The portfolio section on the following pages summarises the acquisitions that
have been made and the impact on FSF's portfolio during the period.
In the aftermath of the UK Government's 'Mini-Budget' in September 2022, we
observed extraordinary levels of market volatility, rising debt costs and
elevated levels of economic uncertainty. In response, we undertook a forensic
review of FSF's entire investment pipeline. Given the market uncertainties, a
cautious approach was adopted and only the most robust and value-accretive
opportunities were progressed. Many opportunities were re-negotiated, and
several aborted. We are pleased to report that this strategy, of highly
disciplined deployment, has worked well. The second largest area of NAV gains
to the period ended 31 March 2023 came from mark‑to‑market gains
realised on properties that were acquired during the period, in what was
otherwise a flat market for afforestation and forestry property values.
The majority of acquisitions in the period were directly originated
off‑market and bilateral opportunities, where we continue to see better
value. These opportunities are sourced from a combination of Foresight's
proprietary market‑mapping deal procurement approach and by leveraging our
extensive network of contacts. We are also increasingly enjoying inbound
approaches from vendors who recognise FSF's strong track record as a reliable,
all‑cash counterparty that operates a highly efficient transaction process.
Immediate mark‑to-market gains on new acquisitions have been underpinned in
many instances through the realisation of marriage value. Acquiring properties
that are either directly adjacent, or in close proximity, to existing FSF
properties can result in scale economies that are reflected in uplifted
valuations when combined. As a result, the acquisitions added to the portfolio
this period were all in FSF's three core property clusters, South and Central
Scotland and South Wales.
Portfolio
As can be seen in the portfolio section below, the acquisition strategy has
shifted this period, from being nearly exclusively focused on afforestation
properties in the prior period, to being on a blend of afforestation, standing
forestry and mixed opportunities. FSF's portfolio started the reporting period
with a 41% allocation to afforestation assets, which is in line with the
target 40‑50% allocation to afforestation. With the re-balance of FSF's
portfolio now complete, this has the potential to materially accelerate the
pace of future deployment. The typical cheque sizes for standing forestry
properties are generally materially larger than those for bare and unplanted
afforestation land.
The other key change which we have had to adapt to has been changes to the
Woodland Carbon Code's ("WCC") new financial additionality rules that became
effective in October 2022.
The new rules require that an afforestation scheme must pass a financial
additionality test to qualify for the issuance of voluntary carbon credits.
The new test focuses on the level of income forgone by converting agricultural
land into forestry. Only projects where the net present value of the
afforestation scheme (purely from an income perspective and using standardised
WCC assumptions) is less than leaving the land in agriculture qualify for
carbon credits. As a result, afforestation developers broadly have three
options. Firstly, if a scheme design does not pass this test, a proportion of
woodland creation grants can be sacrificed until the scheme does pass.
Secondly, the scheme can be redesigned, increasing allocations to
non-commercial broadleaves until the scheme passes the financial additionality
test. Finally, the option not to commence with afforestation on the land in
question remains available.
The new rules are idiosyncratic in how they apply to different land
classifications in different areas of the country. We have carried out a
detailed review of the new rules and have adapted FSF's acquisition approach
accordingly.
We also continue to liaise with the industry and the WCC to identify where
some of the standardised assumptions in the financial additionality test are
creating unusual and unplanned outcomes, and where improvements could be made
to make the test more fair and accurate for applicants whilst continuing to
uphold the important concept of financial additionality for WCC units. Robert
Guest (Co-Lead Manager of FSF) now sits on the WCC Advisory Board, having been
appointed to the position during the period.
In terms of afforestation development during the period, we are delighted to
report that FSF has successfully planted four further afforestation schemes in
the portfolio, including Upper Bar, Auchensoul, Frongoch and Redding Farm. In
total, these schemes have seen c.1 million trees planted over an area that
extends to 426 hectares. The revaluation of these four properties, which have
moved from planting stage afforestation properties to establishment stage
afforestation properties, was the biggest driver of FSF's NAV appreciation
during the period. In total these properties enjoyed gains of £5.0 million
during the period. £3.1 million of this gain was in relation to the
freehold, with the remaining £1.9 million associated with the addition of
another c.107,500 voluntary carbon credit Pending Issuance Units ("PIUs").
It has been pleasing to see the achievement of capital value uplifts versus
the initial cost of acquisition (inclusive of consideration, transaction taxes
and advisor costs) on these four properties has remained at similar levels to
those achieved with FSF's first two planted afforestation properties, Banc
Farm and Mountmill Burn.
In total, as at the reporting period end, FSF has six establishment stage
afforestation properties in the portfolio where 689 hectares are planted.
Across these six properties, c.1.5 million trees have successfully been
planted and are expected to sequester 143,707 tonnes of additional atmospheric
CO2. These properties have enjoyed total returns of over 98.5% (including
freehold and carbon credit appreciation) versus cost to 31 March 2023. We
believe this is a clear testament to the strategy and further enhancement of
FSF's track record for successfully developing afforestation properties in a
way that is strongly value accretive for our investors. Looking forward, we
are excited to progress and plant the remaining 34 development stage
afforestation assets over the coming two years.
The recent and successful completion of planting on these four afforestation
properties has created an additional c.107,500 voluntary carbon credit PIUs,
which are now recognised within the Fund's Net Asset Value. This takes the
total number of voluntary carbon credits recognised on FSF's balance sheet to
143,707 at the period end. The value ascribed to each carbon credit has
remained unchanged at £17.50 per unit during the period. The expansion of
the number of carbon credits in FSF's portfolio means that as at 31 March,
carbon credits were valued at £2.5 million and are now considered a material
part of the portfolio. A more detailed description of the approach and
methodology applied to the valuation of voluntary carbon credits can be found
on page 11 of this report.
During the period, FSF also delivered £1.6 million of returns on standing
forestry properties. Market valuations for standing forestry properties
remained flat during the period. These gains are as a result of a series of
structural enhancement projects the team have delivered, such as restocking
lower yielding species with higher yielding crops, as well as capital
expenditure investments, including upgrades to internal roading and fencing on
portfolio properties.
We have continued to observe UK sawlog prices remaining generally subdued. On
the demand side, the cost-of-living crisis, high inflation and elevated debt
costs are dampening demand. On the supply side, chipwood prices have enjoyed a
c.26% increase as demand for wood pellets to fuel bioenergy plants has
increased in reaction to the Russian invasion of Ukraine and the associated
European energy crisis.
It has been encouraging to see forest and afforestation values hold up in the
face of a more uncertain and volatile economic backdrop, and lower timber
prices during the period.
Forest prices have historically shown to be more resilient during times of
economic stress and we observe that this trend continued during the reporting
period. UK forest owners tend not to use structural leverage for property
ownership, meaning forest prices are less sensitive to rising debt costs than
many other asset classes. Further biological growth of trees occurs regardless
of what is going on in the economy.
Whilst spot timber prices are not immune to economic conditions, forest owners
who are not reliant on taking a consistent and regular cash yield possess a
powerful optionality to choose when to harvest mature trees and bring the
related timber to market for sale. Therefore, forest values are more affected
by investors' long-term view of timber prices than they are of short-term spot
prices. This characteristic makes forest property prices and FSF's NAV less
volatile than many other asset classes to short and medium-term economic
volatility. With respect to FSF's portfolio, we exercised this optionality and
continued to postpone c.117,000 tonnes of timber that has entered this
harvesting window.
It has been pleasing to see both FSF's share price and NAV remain remarkably
resilient during the period, particularly versus the universe of other LSE
listed investment trusts, which have traded on an unweighted discount to NAV
of 12.4% in the six months to 31 March 2023. Resilience has remained a key
facet of forestry and natural capital as an asset class.
To help put our activities into context on a national level, FSF is making a
very material contribution to delivering the government's tree planting
target, with our existing afforestation portfolio covering 4,120 hectares of
land, which will be planted with c.9 million trees. That's equivalent to one
third of the total amount of planting that was achieved in the UK in 21/22,
which totalled 14,000 hectares(1). Tree planting is a core pillar of the UK
Government's national Net Zero strategy, and we're proud to be leading the way
in making this target a reality. In doing so, we are creating new employment
opportunities, ensuring that we are positively contributing to the Just
Transition.
(1) Provisional Woodland Statistics 2022
Portfolio valuation
As at 31 March 2023, the forestry portfolio, excluding additional carbon
credits held through SPVs as described on page 9, was valued at £182.0
million. Since 30 September 2022, 15 assets valued at £30.1 million were
acquired and the property revaluation in the portfolio delivered a gain of
£7.1 million, representing a weighted average (across the three investment
categories) valuation uplift of 4.0%.
Afforestation properties delivered gains of £5.0 million, representing a 7.4%
increase in that category, driven by mark‑to-market gains and recognition of
the successful completion of planting at four properties (Auchensoul, Redding
Farm, Upper Bar and Frongoch).
Standing forestry properties delivered gains of £1.6 million, representing a
2.1% increase in that category, largely driven by mark-to-market uplifts on
recently acquired properties. Valuations for established forest properties
have remained comparatively stable during a period of relatively subdued
timber prices.
Mixed afforestation and forestry properties delivered gains of £0.5 million,
representing a 2.0% increase in that category. Valuations have remained
stable, reflecting the market for forestry properties and the fact that the
afforestation projects included within these mixed properties are yet to
complete planting.
Valuations were conducted by an independent third-party on a
property-by-property basis in accordance with the Royal Institute of Chartered
Surveyors ("RICS") Red Book Fair Value methodology. Despite the challenging
economic issues over the last six months, the investment market for forestry
assets has remained robust, with the independent valuer confirming that there
were enough comparable transactions during the period to provide sufficient
evidence for the portfolio's valuation.
In the same period, four afforestation schemes completed planting and FSF has
recognised an additional £1.9 million of value ascribed to the creation of
carbon credits, bringing the overall portfolio value to £183.9 million. This
estimate takes into consideration the verifier's 20% buffer to ensure that the
number of units offset or traded is conservative versus the amount of carbon
that will be sequestered. The four properties are estimated to create
c.107,500 voluntary carbon credits (net of the 20% buffer) and are part of a
wider afforestation programme that is expected to see the creation of
c.1,000,000 voluntary carbon credits in total from the current portfolio. The
methodology, unit pricing of £17.50 and treatment of the additional value
added at 31 March 2023 has remained consistent with the audited financial
statements as at 30 September 2022.
Portfolio valuation methodology
Savills Advisory Services Limited ("Savills") was engaged by the Company to
provide a fair value valuation of the portfolio in accordance with the Royal
Institution of Chartered Surveyors ("RICS") Valuation - Global Standards
July 2017 (the "Red Book").
The Red Book valuation falls within the International Financial Reporting
Standards ("IFRS"), as part of the International Valuation Standards which
requires investment properties to be considered on the basis of fair value at
the balance sheet date. IFRS 13 outlines the principles for fair value
measurement which Savills valuation is consistent with. The Red Book
valuations are undertaken on a property-by-property basis and is completed
semi-annually.
The fair value assessment of the properties has been completed by Savills on a
comparable basis by looking at transactions of similar properties. Development
Stage and Planting Stage Afforestation property comparables include the rights
to future potential voluntary carbon credit creation. Establishment Stage
Afforestation and Established Forest property comparables exclude any value
ascribed to any associated voluntary carbon credits that have been created.
In addition to the fair value, the Red Book methodology considers a number of
additional factors impacting the valuation. A reasonable view of the
potential for afforestation properties' value uplift over time is considered
rather than valuing the land in its current state. Savills also consider the
stage of each property within the forestry grant application process and may
make reassessments as to the value of properties when a new developmental
milestone occurs. Additionally, as the properties under ownership are located
across the UK (Scotland, North England and Wales), the external valuer
accounts for the potential differences in market interest and demand at the
different locations. On a case‑by‑case basis, Savills will also assess the
extent of damage suffered by sites due to any extreme windblow incidents.
Where damage is extensive, Savills will make prudent adjustments to the value
of the site if it is evident that some of the affected timber may be
challenging to recover.
The value associated with the carbon credits attached with the Establishment
Stage Afforestation properties is excluded from the RICS Red Book valuation of
these properties. Value recognition for carbon credits is ascribed separately
using the Investment Manager's assessment based on a range of recent
comparable voluntary carbon credit transactions that occurred in the period
and observed by leading third party carbon credit consultants and brokers.
When establishing their value of carbon credits, a conservative 25% risk
discount is applied to the average observed unit price of a verified carbon
credit. The risk discount accounts for the Woodland Carbon Code verification
process not having fully completed. As the volume of carbon credits created
by the Company increases, to further add to the robustness and validity of the
carbon credit valuation, it is the intention of the Board, in due course, to
use an independent third-party consultant/valuer to value the Company's carbon
credits.
Portfolio allocation
As at 31 March 2023, the Company's portfolio comprised 65 properties with a
total area of 11,743 hectares. An overview of the portfolio is provided on
page 2 (geographic footprint). The split of hectares by country and the split
of hectares by afforestation/forestry is illustrated below.
Portfolio by area
Key:
Scotland - 85%
England - 5%
Wales - 10%
Key:
Afforestation - 43%
Forestry - 33%
Mixed - 24%
Portfolio by value
Key:
Scotland - 85%
England - 5%
Wales - 10%
Key:
Afforestation - 42%
Forestry - 42%
Mixed - 16%
UK timber market
The timber outputs are divided into the following three categories depending
on the top diameter(1). Quarters follow the calendar year.
a) Sawlog, with a top diameter(1) of 18cm and above, is the primary timber
product and fetches the highest price. This timber can be used for
construction and is often used for fencing posts and other home improvements
b) Small Roundwood, with a top diameter1 between 6-18cm. This is largely
used in fencing panels and pallet construction. It is processed at a separate
mill to sawlog, that is specifically designed to process the smaller pieces of
timber
c) Chipwood, with a minimum top diameter1 of 6cm, is essentially too
small, too large or not straight enough to be processed in a sawlog or fence
wood mill. This product is chipped, rather than sawn. The largest use of
chipwood is in the manufacturing of versatile panel such as Medium Density
Fibreboard ("MDF") and Oriented Strand Board ("OSB"). However, it can also be
used in pulp mills to make paper products or biomass plants, generating power
and heat
(1) Top diameter is a measurement dimension that expresses the diameter
of a log at its thinnest point, furthest from the butt.
The last six-month period has seen a mixed picture for UK timber prices, with
sawlog prices declining by c.5.4%, fencing prices increasing by c.3.7%, and
chipwood prices increasing significantly, by 19.6%.
The UK continues to remain heavily reliant on timber imports, importing c.80%
of all timber consumed. Further, the UK remains the second largest importer of
timber globally, behind only China. As such, UK timber prices are impacted by
both domestic and international timber dynamics. The Investment Manager
believes that the following key themes have impacted on timber prices and the
outlook during the period.
Domestic supply
On the domestic supply side, most of the excess storm damaged timber,
representing c.20% of the UK's annual harvest (or c.4% of the UK's overall
annual demand, once 80% timber importation is considered), from Storm Arwen in
2021 is now understood to have been processed through the timber supply chain.
UK originated timber supply and inventory levels are therefore returning to
more normal levels. This is starting to ease some of the downward pricing
pressure observed in 2022.
Looking forward, the maturity levels of UK commercial forests are such that
reducing supply levels over the medium and long term are a certainty. The
Forestry Commission forecasts that the amount of UK grown softwood that will
reach maturity and be ready for harvest is trending steadily down for the next
five decades. By 2046, the total standing conifer volume is expected to
decline by 15%.
It is the view of the Investment Manager that, now most of the storm damaged
timber has been processed, the impact of Storm Arwen will slightly intensify
the forecast domestic supply contraction - as a reasonable proportion of the
storm-damaged trees will not have achieved optimal size and bulk at the point
they were blown.
The Russian invasion of Ukraine and the related European energy crisis
The global timber market has continued to be significantly impacted by the
Russian invasion of Ukraine, which began on 24 February 2022. Prior to the
invasion, in 2021, Russia, Ukraine, and Belarus accounted for a quarter of
worldwide timber trade. They supplied 8.5 million cubic metres of timber to
Europe, representing c.9% of the region's total demand. In July 2022, all
imports of Russian wood were banned in Europe. Further, the PEFC and FSC
declared that all timber originating from these countries was deemed conflict
timber and no longer certified. This has resulted in the global trade of
softwood logs plunging by 20% during the first half of 2022 year-on-year. This
situation has continued during this reporting period, while Russia furthermore
has been accused of industrial‑scale logging of Ukraine's forests without
compensation. The US has not put a ban on Russian timber in 2022, but instead
placed a 50% tariff. By the end of 2022, US imports of Russian plywood were
half of 2021, but the US still directly imported at least $1.2 billion from
Russia. The reduction in global timber supply has placed more muted downward
pressure on UK sawlog prices during the period, as only c.1.2% of timber
imports were directly from Russia, Belarus and Ukraine prior to the invasion.
The impact of the invasion has been more directly felt on domestic chipwood
prices during the period. As a result of the invasion, Europe has been through
an energy crisis, as it weans itself off Russian‑originated oil and gas.
Biomass material used for bioenergy power plants has become increasingly
scarce. To compensate for reduced Russian gas imports, European and UK
woodchip demand from bioenergy power plants has surged and translated into UK
woodchip prices rising by 19.61% between the end of Q3 2022 and Q1 2023.
In the early part of 2023, European wholesale energy prices have eased,
falling to new lows since the invasion began following a warmer than expected
winter and the implementation of various energy related European policies. The
Investment Manager is of the view that with the invasion ongoing, a European
energy crisis could be re‑ignited in the winter of 2023/2024. Europe will
need to both secure supplies of liquefied natural gas and reduce energy demand
in parallel to avoid significantly escalating gas prices.
Domestic demand softens
Whilst the UK has technically avoided a recession during the period, economic
output has remained subdued. This, combined with a UK cost-of-living crisis,
has resulted in reduced demand for sawlog products during the period. In the
aftermath of the UK Government's Mini Budget, rising debt costs and a
cost-of-living crisis have created uncertainty in the housing sector and
tempered domestic demand for sawlog. Looking forward, the CPA forecasts that
construction output is expected to fall by 4.7% in 2023, and grow by 0.6% in
2024. It is also the view of the Investment Manager that domestic demand for
sawlog will likely remain relatively subdued during 2023 and 2024.
International demand and outlook strengthens
The outlook for American construction looks particularly positive, following
the IRA and the additional timber-related demand this is likely to generate.
US imports from Europe jumped by 27% in 2022 compared to 2021, overtaking the
previous record set in 2005, with the majority imported from Germany. During
the first three months of 2023, construction spending in the US amounted to
$403 billion, 4.3% above the $386.7 billion for the same period in 2022.
However, the potential of the US Government defaulting on its national debt,
due to debt ceiling restrictions, could temper the strong US demand outlook,
if that comes to pass.
The outlook for Chinese timber demand has also improved during the period. The
lifting of strict zero-COVID-19 policies is likely to result in higher
economic growth, more construction and boost Chinese timber demand. In
addition, progress has been made on the Chinese property developer debt
crisis. The Chinese government has introduced a 21-point plan to aid property
developers with financing and debt extensions, worth up to $67 billion, that
is generally expected to bring confidence back to Chinese property and
construction markets, also contributing to an improved outlook for Chinese
timber demand.
Harvesting plan
The harvesting programme for 2023 is still evolving. Previously it was
reported that harvesting would occur across eight properties with an estimated
timber yield of c.100,000 tonnes. However, in light of softening timber prices
towards the end of 2022, the proposed harvesting blocks were not considered
accretive to the fund and so have been postponed.
Following a full review, FSF have identified 18 properties that have
compartments of suitable age and quality for felling from a silvicultural
perspective in 2023. Of these, 11 have been identified as being of potential
interest for felling this year. An NAV accretion analysis tool has been
created to assist with the financial decision making on which compartments to
harvest. This tool will be used in conjunction with live market data to
establish, on an ongoing basis, where harvesting coupes will provide
sufficient value to be felled. If all 11 coupes are felled, they will yield
c.117,000 tonnes of timber.
At five forests, (including Aberarder, Bogforlea, Harthills, Kirkwood and Tom
Na Wan), agreements with James Jones, one of the UK's largest sawmillers, are
in place for them to undertake the harvesting directly. It is likely that
these will proceed at some point during 2023.
Harvesting work will continue at Whiteburn throughout much of 2023. The focus
of this operation is clearing up a block of windblown timber left over from
Storm Arwen. This is largely a silvicultural decision, as the windblown timber
needs to be harvested within a one to two years to limit staining and the
timber drying out and depreciating in value.
Voluntary carbon market
Voluntary carbon credits recognise the additional and permanent capture or
avoidance of carbon dioxide from the atmosphere. Carbon credits can be retired
by companies with net zero pledges to offset unabatable emissions created
within their businesses or indirectly within their supply chains. During the
period, the number of companies setting Science Based Target Initiative
("SBTi") net zero pledges has continued to accelerate, with an all-time
monthly high of 782 companies committing to SBTi in Q1 2023. This takes the
total number of companies which have, or committed to, set SBTi net zero
pledges to 4,797 by the end of Q1 2023. The continued acceleration of net zero
pledges by companies bolsters the long-term demand outlook for voluntary
carbon credits. It is highly likely each of these companies will ultimately
require carbon credits to offset up to 5-10% of their emissions, considered
unabatable in line with SBTi rules.
During the period, voluntary carbon credits have come under the media
spotlight. An article in the Guardian exposed integrity issues with some
avoided deforestation voluntary carbon credits, issued by Verra's REDD+
methodology. We have since observed shifting buyer preferences towards
nature-based afforestation credits, which are seen as high-integrity as they
remove carbon from the atmosphere and permanently store it in organic
material. In contrast REDD+ and similar avoidance-based carbon credits, by for
example conserving nature and avoiding deforestation, less clearly demonstrate
the permanence and additionality principles. The chart in the report from
Trove, a leading voluntary carbon credit research group, illustrates that
whilst prices of avoidance-based credits (e.g. REDD+) have declined 24.0%
during the period, prices of high‑integrity nature-based credits (which
include afforestation credits of the kind that FSF's afforestation portfolio
generates) have increased by 14.8% between September and March.
Despite significant market volatility and uncertainty, it has been pleasing to
see global retirements of voluntary carbon credits remaining steady during the
period, as can be seen on the graph in the report.
FSF's carbon strategy continues its focus on building up its stock of
high-integrity credits. From a UK voluntary carbon market perspective, the
Investment Manager has observed stable pricing for high-integrity WCC Pending
Issuance Units, with its unit price assumption remaining unchanged at
c.£17.50 per tonne during the period. The Investment Manager remains
optimistic about the prospects for pricing growth in WCC units that FSF's
portfolio expects to generate over time, providing that the Company can
continue to demonstrate that its units are of the highest quality in the
future.
We are keenly attuned to the development of the LSE's Voluntary Carbon Market.
This, as introduced by the Company's Chairman, allows market participants to
easily identify listed investment companies that are contributing positively
to the establishment and scale-up of voluntary carbon markets. FSF qualifies
under all of the criteria and as part of this, FSF intends to give investors
the choice to receive cash dividends from the net proceeds of the sale of
voluntary carbon credits, or to elect to receive in-specie voluntary carbon
credit dividends. If credits are received in‑specie they can be directly
utilised by the recipient for its own net zero offsetting or onward carbon
trading strategy. The designation enables investors to:
d) Secure a supply of voluntary carbon credits for net zero commitments or
trading purposes
e) Hedge against the risk of rapidly rising voluntary carbon credit prices
f) Generate an attractive underlying risk adjusted return via the
Company's land development and timber operations (over and above the voluntary
carbon value) with FSF's listed structure allowing the flexibility to adjust
the volumes of shares held as the investor's carbon credit yield requirements
change over time
Health and safety ("H&S")
There were no H&S incidents (near misses or RIDDORs) during the period
across the portfolio. Despite this, H&S management of the sites remains a
key focus for FSF. Operational activities across all of the portfolio continue
to be monitored to ensure that the correct information is provided at regular
intervals, so appropriate action taken where necessary.
During the period, the Investment Manager conducted the second annual health
and safety audit of a Forest Manager. The Asset Management team continue to
work closely with E.J. Downs Forestry ("EJDF"), who have significant
experience in the forestry management space and advise the Company on
silvicultural decisions, to implement the recommendations from this report.
Forest Managers continue to work on compiling hazard maps for each site to
identify and mitigate all risks that may be present. In addition, a near miss
incentive scheme has also been developed and initiated to encourage the
reporting of near miss events across the forestry operations.
Afforestation property development progress
FSF has now acquired 40 sites with afforestation potential. During the period,
FSF has been developing a more efficient categorisation of afforestation
development. The definitions of these phases can be found below:
g) Development Stage Afforestation
Land prior to the securing of planning permission and grant application.
h) Planting Stage Afforestation
Planning permission and grant application completed but initial planting of
trees not yet completed.
i) Establishment Stage Afforestation
Initial planting of site completed but trees establishing and stabilising
(typically a 3-5 year period).
j) Established Forests
Trees stabilised and established.
All FSF afforestation sites have been categorised in line with the definition
above, as follows:
Development Planting Establishment Stage
Stage
Stage
Property name Afforestation Afforestation Afforestation. Established Forest
Auchensoul • • • -
Banc Farm • • • -
Frongoch • • • -
Mountmill Burn • • • -
Redding Farm • • • -
Windylaws • - - -
Allanton Farm • - - -
Bedehouse & East Bennachie • - - -
Brown Hill • - - -
Bruntaburn Forest • - - -
Brynglas • - - -
Burn of Bellyhack • - - -
Cessnock Wood • - - -
Chatto Craigs • - - -
Cheterknowes Wood • - - -
Coed Doethie • - - -
Coed Y Garreg • - - -
Cwmban Fawr Farm • - - -
Dove Hill • - - -
Drove Road Wood • - - -
Esgair Hir • - - -
Fordie Estate • - - -
Glendyne Wood • - - -
Goukstane Wood • - - -
High Auldgirth • - - -
Highside Wood • - - -
Knock Fell • - - -
Knocktail Wood • - - -
Lambs Craig • - - -
Liddel Water • - - -
Maescastell • - - -
Ness Bogie • - - -
Newnoth Farm • - - -
Nor Hill • - - -
Piltanton Wood • - - -
Pistyll South • - - -
Reams Hill • - - -
Red Craig & Glen Burn • - - -
Rorie Hill • - - -
(1) Status as at 31 March 2023.
The Investment Manager continues to attach a high importance to achieving the
development milestones. It is an important metric for the Company both in
terms of driving returns and achieving its sustainability targets. To date,
690 hectares have been consented and planted, meanwhile 3,430 hectares with
afforestation potential continue to be developed.
Asset Classification Hectares
Development Stage Afforestation Assets(1) 3,430
Planting Stage Afforestation Assets(1) -
Establishment Stage Afforestation Assets(1) 690
Established Forest Assets(1) 5,772
Other Land(2) 1,851
Total 11,743
(1) Hectares within woodland creation scheme boundary or managed forest
boundary.
(2) Other Land is held as part of the core Forestry Assets allocation
and can accompany both afforestation and Established Forest Assets. It
includes land that is considered unplantable due one or multiple constraints.
For example other land includes, but is not limited to, areas of land that are
too steep slopes, areas of deep peat and waterways.
Pipeline and deal procurement
Foresight sources deals and acquisition opportunities via selling agents,
on-market bids, bilateral deals, direct origination and direct approaches.
Approximately 4,500 specific properties (c.900,000 hectares) which are highly
suitable for afforestation have been identified by the Investment Manager,
which is able to secure transaction opportunities through its direct
origination system. The Company has priority over these and other Foresight
forestry opportunities that are within the Company's mandate.
At the time of writing, FSF has a live pipeline of afforestation and forestry
opportunities worth c.£77.4 million.
Community engagement
Throughout the period, FSF has continued to engage closely with communities to
ensure maximum benefit is gained by local residents from each of FSF's sites.
As part of our standard approach, three afforestation sites were taken through
a formal community engagement process during the period, culminating in the
successful planting of four woodland creation schemes(1). Community engagement
meetings will continue to take place for all other afforestation schemes in
the portfolio.
In addition to this, several other community based projects are being
developed and implemented across the properties in the FSF portfolio, for
example:
k) Mountain bike trails are being developed at Banc Farm along with a car
park to enable access. Discussions are ongoing with the local mountain bike
group and the hope is that the trails will be in use later this year
l) An area of c.20 hectares is being leased back to the community at
Upper Barr to undertake a community planting scheme
m) A parcel of land has been gifted to the local Chapel at Frongogh, to
enable it to extend their otherwise full graveyard
n) A larger parcel of land at Frongoch, considered inappropriate for tree
planting, has been leased back to a local farmer. This enables ongoing
employment in the farming industry and diversifying the land use within the
valley
Representatives of FSF attended a community wealth building day in Moffat
during the period. The session was organised by South Scotland Enterprises and
Scottish Forestry and included representatives from a series of key
stakeholders from the forestry industry in south Scotland.
During the period, FSF also completed the pilot of its Forestry Skills
Training Programme. The initiative was established to ensure that FSF is not
just making material contributions to the twin fights against climate change
and biodiversity loss, but is doing so in a way that enables a just
transition. Following the success of the pilot, steps were taken during the
reporting period to refine and significantly expand the programme. This has
culminated in FSF announcing, in May 2023, that it has launched the 2023
Forestry Skills Training Programme.
The number of places available this year has increased from four to ten, and
the geographic scope increased from being only available in Wales, to being
available in Wales and Scotland. We are deeply proud of the deep real-world
impact the pilot has had on local communities, and are excited to now scale
the initiative.
(1) Redding Farm was purchased with an approved woodland creation grant
contract, so no community engagement was carried out by Foresight.
Upside opportunities
Upside opportunities continue to be identified and progressed across the
portfolio with key themes including wind farm development, eco-tourism and
disposing of, repurposing or renovating buildings that were included as part
of the original land acquisition. Each upside opportunity is reviewed on its
merits and taken forward on a case‑by‑case basis. For the reporting
period, specific examples include agreeing exclusivity for a small wind farm
development and signing a new two-year PPA for the hydro plant at Fordie on a
very favourable rate.
Biodiversity enhancement and nature-based credits
Discussions continue with our partners and consultants on the potential
verification routes/tools to determine biodiversity baselines across the
portfolio. A number of metrics for measuring biodiversity have been screened
such as the DEFRA metric, the Biodiversity Intactness Index and FSC Ecosystem
Services. In addition, the Company continues to explore how nature enhancement
projects can translate into a tangible financial benefit for the Company is
ongoing. There are a number of standards including Plan Vivo and Credit Nature
that are developing methodologies to verify and issue nature-based credits.
The data being collected in order to baseline biodiversity is intended to
become the basis for any future biodiversity credits created. The exploration
of bundling nature enhancement value with carbon credits is underway and
ongoing.
AFFORESTATION CASE STUDY
REDDING FARM
South Lanarkshire, Scotland
Redding Farm is a 71 hectare afforestation property in South Lanarkshire,
Scotland. The property was acquired in November 2022 and has 52 hectares of
land deemed suitable for afforestation development.
Shortly prior to purchase, planting designs for a Woodland Creation Scheme
were finalised and this was followed by planting grant application submission.
FSF unusually acquired the property with planning consent and a grant contract
in place. Following acquisition, FSF engaged with Cheviot Trees to provide the
trees required for the development of the property. It is common practice for
FSF to begin conversations with suppliers at an early stage to establish what
stock is available. Following initial contact with the nursery, the quantity
of trees required was refined to specifically suit the planting design, which
is usually completed in parallel with the grant application.
There is a two-year process at the tree nursery to prepare the saplings for
planting. This involves propagating the seeds, transferring them outside,
biological growth, picking the saplings, grading them and placing them in cold
storage. For the trees at Redding Farm, this process was complete by November
2022. The saplings arrived at the property in two deliveries, on the 13 and 20
March 2023, after much of the ground prep had been undertaken.
The ground prepping involves a tractor turning over 'mounds' of turf to
provide suitable and evenly spaced sites to plant the saplings. This ensures
that as soon as the saplings arrive, planting can commence. The planting
process is done manually, rather than mechanically. This is still considered
to be best practice due to mechanical planting being more costly and
susceptible to weather. At Redding Farm, the planting team were able to
complete the whole planting stage in 17 days.
The sensitive planting design incorporated 18% Broadleaves and open ground,
with Sitka Spruce forming 43% of the gross area. A total of 108,400 trees were
planted and the Forest Manager will continue to monitor the planting
throughout the summer to ensure the trees are establishing properly.
Throughout the growing season, weed control, mowing and other maintenance work
will be undertaken as and when required to minimise competition with the tree
saplings.
At the end of the first growing season, which runs from Spring 2023 to Autumn
2023, a survey will be taken by the Forest Manager to establish how many of
the saplings have failed. Replacement saplings will then be ordered and
planted to replace the failed saplings. This process is known as 'beating up'
and is a important step of successful forest establishment.
The process of weed control and mowing will continue for approximately three
growing seasons. At Redding Farm this will continue through to the end of
summer 2025, at which point the trees are expected to be considered
successfully established. Visually, the commercial species, such as Sitka
Spruce will look like small trees and typically be 1.0-1.5m in height three
years after planting. The native broadleaves have more varied growth rates in
early years and typically be 0.75-2.0m in height three years after planting.
However, this is the point at which FSF will view the site as an established
forest, rather than as an afforestation site.
Grant payments are available across the first 5-years of forest establishment,
which offsets a significant proportion of the capital expenditure associated
with forest establishment.
Investment overview
Company Foresight Sustainable Forestry Company Plc
Property location South Lanarkshire, Scotland
Property type Afforestation
Project size 71 hectares
Operational date 31.03.2023
Investment amount £0.95 million, including deal costs, but excluding all afforestation costs
SUSTAINABILITY AND ESG
Introduction
Sustainability and strong governance are fundamental to FSF's business model,
as captured in the Company's three key Sustainability and ESG objectives:
2023 Interim highlights
o) The publication of the Company's first dedicated S&ESG report.
p) Voluntary Carbon Market Designation.
q) Hosted 27 school children from Carreg Hirfaen school to play a part in
the planting at Frongoch
Key objective 1: timber supply
To deliver and increase the supply of homegrown UK timber to reduce the
country's reliance on imports.
Key objective 2: sustainable returns
To do so in a way that combines sustainable financial returns with carbon
sequestration, biodiversity protection and other positive environmental and
social impacts.
Key objective 3: progressive industry leadership
To be a sustainability leader in the UK forestry industry whilst delivering
both traditional commercial timber products and innovative natural capital
services.
Sustainability and ESG report
In April 2023, post-period end, the Company published its first dedicated
S&ESG report which outlined the Company's S&ESG vision and provided
stakeholders with an update on the Company's delivery against its Key
Sustainability and ESG objectives over the period ended 30 September 2022. The
report is available on the Company's website. The report also explains the
natural capital land management approach that the Company is applying with a
view to generating natural capital alpha, which is the delivery of ecosystem
services to society alongside resilient risk-adjusted financial returns to its
Shareholders. These concepts and the related terminology are described in
the report which is available on the Company's website.
Sustainable development goals ("SDGs") impact reporting
FSF embeds sustainability at the core of its business. The SDG's represent a
core driver of the Company's investment activities. The Company believes it
can make the greatest contribution to five of the SDGs. In the following
pages, we demonstrate the progress made by the Company in each of these core
areas for the period 1 October 2022 to 31 March 2023.
Timber supply chain
Goal SDG Target Contribution
12.2 Achieve the sustainable management and efficient use of natural Number of tonnes of sustainably grown, standing timber.
resources.
Percentage of commercial forestry projects that are dual FSC and PEFC
certified within 12 months of acquisition.
990,701 100%
tonnes of standing commercial timber existing forestry dual FSC and PEFC certified in line with commitment to dual
certify within 12 months
Environmental impact
Goal SDG Target Contribution
3.9 Substantially reduce the number of deaths and illnesses from hazardous Number of tonnes of pollutants(1) removed from the atmosphere, including:
chemicals and air, water and soil pollution and contamination.
NOx (Nitrous Oxide), SOx (Sulphur Dioxide), PM10 (μm10 Particulate Matter),
PM2.5 (μm2.5 Particulate Matter), Ground-level Ozone, NH(3) (Ammonia).
Pollutant removal
Key:
Ground-level Ozone
PM10
PM2.5
NH(3)
SOx
NOx
191,058 kg
of pollutants removed from the atmosphere
140,643 kg 22,807 kg
of Ground-level Ozone of PM10 (μm10 Particulate Matter)
7,602 kg 3,801 kg
of NH(3) (Ammonia) of SOx (Sulphur Dioxide)
11,403 kg 1,901 kg
of PM2.5 (μm2.5 Particulate Matter) of NOx (Nitrous Oxide)
Goal SDG Target Contribution
6.6 Protect and restore water‑related ecosystems, including mountains, Number of kilometres of sustainably managed watercourses.
forests, wetlands, rivers, aquifers and lakes.
Sustainably managed watercourses
325(2)
kilometres of sustainably managed watercourses
(1) Office for National Statistics, woodland natural capital accounts,
UK 2020.
(2) Includes all permanent water courses and larger drains whether
wholly inside the property boundaries or located on the property boundary with
a shared responsibility for watercourse management.
Goal SDG Target Contribution
13.3 Strengthen resilience and adaptive capacity to climate‑related hazards Total annual portfolio sequestration (tCO(2)e/annum).
and natural disasters in all countries.
Average annual sequestration per stocked ha (tCO(2)e/stocked ha).
Average annual sequestration per gross ha.
Carbon Sequestration(3)
17,036 tCO(2)e 1.5 tCO(2)e / stocked ha 3.8 tCO(2)e / ha
arboreal sequestration achieved over the reporting period within the average arboreal sequestration on a per stocked hectare basis average arboreal sequestration per gross hectare.
portfolio. (commercial + non‑commercial).
Natural capital services
Goal SDG Target Contribution
15.2 By 2020, promote the implementation of sustainable management of all Number of hectares of sustainably managed forests
types of forests, halt deforestation, restore degraded forests and
substantially increase afforestation and reforestation globally. Of which:
r) Number of hectares that are long-term, mixed broadleaf carbon sinks
s) Number of hectares that are SSSI/SAC(1,2)
Biodiversity
Key:
Open ground - 61%
Commercial forestry - 32%
Native broadleaves/long‑term carbon sink - 7%
11,743 ha 7,218 ha
total hectarage of portfolio (inc. forests and open ground) of open ground and land awaiting approval for afforestation
765 ha
of which is SSSI1/SAC(2,3)
3,704
of which is total hectarage of sustainably managed commercial forests
821 ha
of which is long‑term, mixed broadleaf carbon sinks
(1) Site of Special Scientific Interest.
(2) Special Area of Conservation.
(3) Both SSSI and SAC areas will be included within the open ground.
Carbon credits
Carbon credits generated:
PIUs held on balance 143,707
PIUs sold -
WCUs held on balance -
WCUs sold -
Total carbon credits held on balance 143,707
Total carbon credits sold -
Richard Kelly, Managing Director, Foresight Group and Co-lead Manager of FSF,
with three of the four successful FSF Forestry Skills Training Programme
graduates at a community tree planting day at Frongoch, Wales, in March 2023.
Following this success of this pilot initiative, the Company is proud to have
extended both the scale and geographic scope of the initiative in 2023. The
number of places has been increased from four to ten, and the geographic scope
extended from just in Wales, to cover both Wales and Scotland. It is through
initiatives like this, that FSF is ensuring it is making a direct contribution
to the twin fights against climate change and diversity loss in a way that
also enables a just transition. A detailed case study covering this initiative
can be found in the Company's 2022 Sustainability and ESG Report.
TCFD AND EMISSIONS REPORTING
The Company's focus for quantitative reporting of exposure to
climate‑related risks is achieved using the universally accepted core
metrics, as recommended by the Task Force on Climate Related Financial
Disclosures ("TCFD").
TCFD
The Company's S&ESG report, published in April 2023, provides a
comprehensive response to all 11 of the disclosures and can be found on the
Company's website.
Climate scenario analysis
As part of the Company's disclosures under TCFD, the S&ESG report
demonstrated the approach it has taken to conducting robust Scenario Analysis
using S&P Global's Climanomics platform. This integrated not only physical
and transition risks, but also climate‑related opportunities, providing a
single output reflecting the resilience of the portfolio under different
climate futures.
The Sustainable Finance Disclosure Regulation ("SFDR")
SFDR is a framework designed to increase transparency on sustainability
reporting with a view to facilitating sustainable investment practices and to
aid the understanding of the sustainability credentials as published by funds
and/or companies. FSF considers itself and Article 9 fund. In compliance with
the Level 2 disclosure requirements under the Regulatory Technical Standards
(RTS), 1 the Company updated its pre-contractual and website disclosures, both
of which can be found on the Company's website.
For the purposes of periodic disclosure updates, the Company will be aligning
its reference period with its annual reporting period, namely 1 October to 30
September.
RISK AND RISK MANAGEMENT
Risk and risk management
FSF has a comprehensive risk management framework overseen by the Audit and
Risk Committee, comprising the independent Non-Executive Directors.
The Directors consider the following as the principal risks and uncertainties
to the Company at this time:
t) The Company being unable to access sufficient funding to complete its
growth ambitions
u) A reduction in demand from the users of timber that negatively impacts
profitability
v) Resistance to change of land use from the public generating negative PR
and impacting the Company's ability to obtain planning consent
w) Changes in the economic, technological, political or regulatory
environment, including inflation
The following represent the most relevant emerging risks as viewed by the
Board and the Investment Manager:
The Company is exposed to a number of risks that have the potential to
materially affect the Company's valuation, reputation and financial or
operational performance. The nature and levels of risk are identified
according to the Company's investment objectives and existing policies, with
the levels of risk tolerance ultimately defined by the Board.
Financing capital
As a newly listed entity, the Company is focused on growing its portfolio. In
order to achieve our growth ambitions and to ensure the Company is able to
take full advantage of the opportunities in its pipeline, additional financing
will be required in the short to medium term.
The Company's borrowing policy enables the Directors to use gearing for
liquidity and working capital purposes, or to finance acquisition of
investments subject to following a prudent approach and maintaining a
conservative level of aggregate borrowings that will not exceed 30% of Gross
Asset Value, calculated at the time of drawdown. The Company has a
£30 million Revolving Credit Facility, that at the end of the period remains
fully undrawn. The equity levels of the Company are closely monitored by the
Board and the Investment Manager on a regular basis.
The Company continues to work closely with its broker, Jefferies International
Limited, and the Investment Manager's in-house Retail Sales team, will conduct
market research ahead of any future funding rounds to gauge demand from
existing and new investors.
Timber market volatility
Timber prices can be volatile periodically. However, demand over the medium to
long term has historically created real-term pricing growth. In the context of
global under-supply and increasing demand, this reduces market risk for the
sale of the Company's key products and revenue streams.
Should timber prices be less attractive at the point of felling,
the Investment Manager also has the option to delay felling, allowing trees
to continue to grow and provide time for a recovery from short-term pricing
volatility.
Community engagement
The development of afforestation assets in rural areas is sensitive for local
residents and, if managed unsatisfactorily, could result in poor relationships
developing between the Company and local communities. This in turn could
impact both the Company's reputation, ability to obtain the necessary planning
consent for planting to commence and potentially the Company's share price.
During the due diligence phase of afforestation investments, the Investment
Manager commissions an independent community risk assessment to ensure that
afforestation only takes place in areas where tree planting is less likely to
be a contentious issue. A separate planning risk assessment is also
undertaken ahead of all potential land acquisitions where afforestation is
intended and the Investment Manager only pursues opportunities where the risk
of not obtaining planning consent, including for reasons relating to
objections raised by the local community, is assessed to be low.
Once afforestation properties are acquired, the Investment Manager runs a
co-ordinated programme of community engagement and seeks to respond and,
wherever possible, adapt the scheme design to meet concerns raised by
community members.
In addition, in the event that planting was unable to go ahead, the acquired
land would still have agricultural value. Therefore, whilst the return
generated from this would be lower, an income stream would still be available
to the Company.
The Company is also working closely with industry bodies such as Confor and
Timber Development UK to promote the merits of increased sustainable UK timber
supply. The Investment Manager has piloted and is significantly expanding its
Forestry Skills Training Programme that enables members of rural farming
communities to adapt to afforestation-related land use change by providing
them with all of the skills, training, certifications, safety equipment and
mentoring required to commence a new career in forestry.
Changes in the macroeconomic environment
The UK economy has seen significant fluctuations in growth over the last two
years, predominantly due to Russia's invasion of Ukraine, rising debt costs
and persistently high inflation.
However, the Company is in a relatively strong position to withstand changes
in the macroeconomic environment as it is invested in real assets, principally
freeholds of UK land and forest stock. The forest stock enjoys biological
growth regardless of occurrences in financial markets. UK freeholds, real
assets and the value of commodities, such as timber, have a strong track
record of good performance during periods of inflation and instability of
equity markets. In the view of the Investment Manager, the continued global
supply and demand imbalance in timber markets, which is accentuated in the UK
as a net timber importer and during a period where GBP is weak versus EUR and
USD, leaves the Company well positioned to deliver real term value growth for
Shareholders. Moreover, FSF is in a position to mitigate the impact of any
intra-quarter or intra-year falls in timber prices by postponing parts of its
harvesting programme, and allowing the trees to continue to grow until the
underlying imbalance between supply and demand begins to be reflected in
market prices again.
FINANCIAL REVIEW
Analysis of financial results
The condensed set of financial statements of the Company for the six-month
period ended 31 March 2023 are set out on pages 34 to 55.
The Company prepared the condensed unaudited financial statements for the
period to 31 March 2023 in accordance with IAS 34 as adopted by the UK and
issued by the International Accounting Standards Board. The Company applies
IFRS 10 and Investment Entities: Amendments to IFRS 10, IFRS 12 and measures
all their subsidiaries that are themselves investment entities at fair value.
The Company accounts for its interest in its wholly owned direct subsidiary
FSFC Holdings Limited as an investment at fair value through profit or loss in
accordance with IFRS 13 Fair Value Measurement.
The primary impact of this application, in comparison to consolidating
subsidiaries, is that the cash balances, the working capital balances and
borrowings in the intermediate holding companies and project companies are
presented as part of the Company's fair value of investments.
The Company's intermediate holding companies provide services that relate to
the Company's investment activities on behalf of the parent which are
incidental to the management of the portfolio.
The Company, its subsidiaries FSFC Holdings Limited and FSFC Holdings 2
Limited (together the "Group"), hold investments in 65 portfolio properties
held within five special purpose vehicles which intend to make distributions
in the form of interest on loans and dividends on equity as well as loan
repayments and equity redemptions.
For more information on the basis of accounting and Company structure, please
refer to the notes to the condensed unaudited financial statements on pages 40
to 55.
Key financial metrics for the period ended 31 March 2023
As at As at
31 March 30 September
All amounts presented in £million (except as noted) 2023 2022
Gross Asset Value ("GAV")(1) 186.6 180.6
Net Asset Value ("NAV")(2) 186.6 180.6
NAV per share (pence) 108.5 105.0
Total Income 7.3 11.0
Profit before tax 6.0 8.8
Earnings per share (pence) 3.5 6.2
(1) Calculated as the sum of the NAV and total outstanding debt on page
37.
(2) Total equity as per the statement of financial position on page 37.
Net assets
Net assets increased 3.3% from £180.6 million at 30 September 2022 to £186.6
million at 31 March 2023.
The Net Assets of £186.6 million comprises £181.4 million portfolio value of
forestry and afforestation assets, with an additional £2.5 million carbon
credit valuation and cash balances of £3.8 million comprising cash of £1.6
million in the Company and £2.2 million in the project companies, offset by
£1.1 million of other net liabilities (£1.8 million of other assets in the
Company and £2.9 million of other liabilities in the project companies).
At 31 March 2023, the Group's Revolving Credit Facility of £30.0 million
remained undrawn. The GAV is equal to the sum of the NAV and the outstanding
debt as described in the alternative measures table on page 33. The GAV as at
31 March 2023 was £186.6 million.
Analysis of the Group's net assets at 31 March 2023
As at As at
31 March 30 September
All amounts presented in £million (except as noted) 2023 2022
Red Book valuation(1) 181.4 144.2
Carbon credits valuation(2) 2.5 0.6
Portfolio Value 183.9 144.8
Project companies' cash 2.2 2.0
Project companies' other net liabilities (2.9) (0.5)
Investments at fair value through profit or loss 183.2 146.3
Company's cash 1.6 34.3
Company's other net assets 1.8 -
Net Asset Value 186.6 180.6
Number of shares 172,056,075 172,056,075
Net Asset Value per share (pence) 108.5 105.0
(1) Classified as the fair value of the underlying forestry assets held
through the SPVs.
(2) The carbon credit valuation noted is based on value ascribed to
progress towards creation of carbon credits.
Net Asset Value bridge
During the period from 30 September 2022, there was an £8.6 million fair
value increase of the afforestation and forestry assets held by the Group,
offset by Fund operational expenditure of £2.0 million, £1.3 million of
afforestation and restock costs and deal costs of £1.5 million. An additional
107,591 of carbon credits attributed to four underlying afforestation assets
where planting has been completed in the period have also been valued at £1.9
million, resulting in a Net Asset Value of £186.6 million at 31 March 2023.
Company performance
Profit and loss
The Company's profit before tax for the six month period to 31 March 2023 was
£6 million generating earnings of 3.5 pence per share.
For the same period to 31 March 2023, the total return on investments was
£7.3 million, which relates to £1.4 million of interest on the FSFC
Holdings loan notes and £5.9 million net gains on investments at fair value.
The interest income is from the Company's Shareholder loan to FSFC Holding
Limited. The net gain on investment is generated by the net fair value
movement on the Company's investment in FSFC Holding Limited.
Operating expenses included in the income statement for the period were
£1.3 million, in line with expectations. These comprise investment
management fees of £0.8 million and £0.5 million of operating expenses.
The details on how the investment management fees are charged are set out in
note 5 to the financial statements.
Period from
Period from incorporation
1 October On 2021
2022 to 31 August to
31 March 30 September
All amounts presented in £million (except as noted) 2023 2022
Interest received on FSFC Holdings loan notes 1.4 0.9
Net gain on investments at fair value 5.9 10.1
Total return on investment 7.3 11.0
Operating expenses (1.3) (2.2)
Profit before tax 6.0 8.8
Earnings per share (pence) 3.5 6.2
Ongoing charges
The ongoing charges ratio is an indicator of the costs incurred in the
day-to-day management of the Fund. FSF uses the AIC-recommended methodology
for calculating this ratio, which is an annual figure.
The ongoing charges ratio percentage was 1.4% in September 2022 and remains
the same for the six-month period to 31 March 2023 (annualised).
The ongoing charges have been calculated, in accordance with AIC guidance, as
annualised ongoing charges (i.e., excluding acquisition costs and other
non-recurring items) divided by the average published unaudited Net Asset
Value in the period. The ongoing charges percentage has been calculated on the
consolidated basis and therefore takes into consideration the expenses of the
Company, FSFC Holdings Limited and FSFC Holdings 2 Limited.
The Investment Manager believed this to be competitive for the market in which
FSF operates and the stage of development and size of the Fund, demonstrating
that management of the Fund is efficient with minimal expense incurred in its
ordinary operation.
Cash flow
The Company held cash balances at 31 March 2023 of £1.6 million. This amount
excludes cash held in subsidiaries. The breakdown of the movements in cash
during the period is shown below.
Cash flows of the Company for the period to 31 March 2023 (£million)
Period from
incorporation
Six months on 31 August
ended 2021 to 30 September
31 March
2023 2022
Opening cash balance 34.3 -
Gross proceeds from IPO and fundraising - 175.0
IPO and share issuance costs - (3.2)
Investment in FSFC Holdings Limited (equity and loan notes) (31.0) (136.2)
Group movements in working capital (0.4) 0.9
Directors' fees and expenses (0.1) (0.1)
Investment management fees (0.8) (1.1)
Administrative expenses (0.5) (1.0)
Company's closing cash balance 1.6 34.3
Cash flows of the group for the period to 31 March 2023 (£million)
The Group is defined as the Company and its two intermediate holding
companies. The cash flows for the Group of £1.9 million include £0.3 million
in FSF Holdings 2 Ltd.
Alternative performance measures ("APMs")
Purpose Calculation APM value Reconciliation to IFRS
Gross Asset Value ("GAV")
A measure of the value of the Company's total assets. The sum of net assets of the Company as shown on the statement of financial £186.6 million The calculation uses the Net Asset Value as per statement of financial
position and the total debt of the Group. position on page 37 and total outstanding debt.
Net Asset Value per share
Allows investors to gauge whether shares are trading at a premium or a The net assets divided by the number of Ordinary Shares in issuance. 108.5p As per the closing Net Asset Value per the statement of financial position on
discount by comparing the Net Asset Value per share with the share price. page 37, the closing number of Ordinary Shares as per Note 13 of the financial
statements on page 48.
Total NAV return since IPO
A measure of financial performance, indicating the movement of the value of Closing NAV per share as at 31 March 2023 plus all dividends since IPO 10.6% The calculation uses the Net Asset Value as per the statement of financial
the Fund since IPO and expressed as a percentage. assumed reinvested, divided by the NAV at IPO expressed as a percentage. position on page 37 and cash dividends as per the statement of cash flows on
page 39.
Market capitalisation
Provides an indication of the size of the Company. Closing share price as at 31 March 2023 multiplied by the closing number of £185.8 million The calculation uses the closing share price as per key investment metric
Ordinary Shares in issuance. table on page 29, and closing number of Ordinary Shares as per Note 13 of the
financial statements on page 48.
Ongoing charges
A measure, expressed as a percentage of average net assets, of the regular, Calculated and disclosed in accordance with the AIC methodology. Annualised 1.4% Ongoing charge is detailed on page 31.
recurring annual costs of running the Company per Ordinary Share. expenses divided by average NAV.
FINANCIAL STATEMENTS
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Disclosure Guidance and Transparency Rules ("DTR") of the UK Listing
Authority require the Directors to confirm their responsibilities in relation
to the preparation and publication of the Unaudited Interim Financial Report
for the period ended 31 March 2023.
The Directors confirm to the best of their knowledge that:
(a) The condensed set of financial statements, which has been prepared in
accordance with the applicable set of accounting standards, gives a true and
fair view of the assets, liabilities, financial position and profit or loss of
the issuer, or the undertakings included in the consolidation as a whole as
required by DTR 4.2.4 R
(b) The interim management report includes a fair review of the
information required by DTR 4.2.7 R
(c) The interim management report includes a fair review of the
information required by DTR 4.2.8 R
Richard Davidson
Chair
For and on behalf of Foresight Sustainable Forestry Company Plc
12 June 2023
CONDENSED UNAUDITED STATEMENT OF COMPREHENSIVE INCOME
for the period to 31 March 2023
Period from Period from Period from
01 October 31 August 31 August 2021
2022 2021 to 30
to 31 March to 31 March September
2023 2022 2022
Revenue Capital (Unaudited) (Unaudited) (Audited)
Notes £'000 £'000 £'000 £'000 £'000
Return on investment 4 1,470 5,877 7,347 8,868 11,024
Total income 1,470 5,877 7,347 8,868 11,024
Investment management fees 5 (767) - (767) (380) (1,071)
Operating expenses 6 (568) - (568) (584) (1,166)
Total expenses (1,335) - (1,335) (964) (2,237)
Profit before tax 135 5,877 6,012 7,905 8,787
Tax 8 - - - - -
Profit for the period 135 5,877 6,012 7,905 8,787
Earnings per share (pence) 9 0.1 3.4 3.5 6.1 6.2
All results are derived from continuing operations.
The supplementary revenue and capital columns are presented for information
purposes in accordance with the Statement of Recommended Practice issue by the
Association of Investment Companies ("AIC").
There are no items of other comprehensive income in the current period, other
than the profit for the period, and therefore no separate statement of
comprehensive income has been presented.
The accompanying notes on pages 40 to 55 form an integral part of the
condensed set of financial statements.
CONDENSED UNAUDITED STATEMENT OF FINANCIAL POSITION
As at 31 March 2023
31 March 31 March 30 September
2023 2022 2022
(Unaudited) (Unaudited) (Audited)
Notes £'000 £'000 £'000
Non-current assets
Investments at fair value through profit or loss 10 183,195 126,448 146,291
Total non-current assets 183,195 126,448 146,291
Current assets
Trade and other receivables 11 2,112 1,218 852
Cash and cash equivalents 16 1,595 8,643 34,326
Total current assets 3,707 9,861 35,178
Total assets 186,902 136,309 181,469
Current liabilities
Trade and other payables 12 (304) (790) (886)
Total current liabilities (304) (790) (886)
Total liabilities (304) (790) (886)
Net assets 186,598 135,519 180,583
Equity
Called up share capital 13 1,721 1,300 1,721
Share premium 13 43,819 126,314 170,075
Revenue reserve (1,198) (855) (1,333)
Capital reserve 14 142,256 8,760 10,120
Shareholders' funds 14 186,598 135,519 180,583
Net assets per share (pence per share) 15 108.5 104.2 105.0
The accompanying notes form an integral part of the condensed set of financial
statements.
The condensed set of unaudited financial statements were approved by the Board
of Directors and authorised for issue on 13 June 2023.
They were signed on its behalf by:
Richard Davidson
Chair
CONDENSED UNAUDITED STATEMENT OF CHANGES IN EQUITY
for the period to 31 March 2023
Called up Share Capital Revenue
share capital premium reserve reserve Total
Notes £'000 £'000 £'000 £'000 £'000
Balance at 1 October 2022 1,721 170,075 10,120 (1,333) 180,583
Gross proceeds from share issue - - - - -
Share issue costs 13 - 3 - - 3
Dividends 7 - - - - -
Share premium cancellation 13 - (126,259) 126,259 - -
Total comprehensive income
for the period 14 - - 5,877 135 6,012
Net assets attributable to
Shareholders at 31 March 2023 1,721 43,820 142,256 (1,198) 186,598
Called up Share Capital Revenue
share capital premium reserve reserve Total
Notes £'000 £'000 £'000 £'000 £'000
Balance at 24 November 2021 - - - - -
Gross proceeds from share issue 1,300 128,700 - - 130,000
Share issue costs 13 - (2,386) - - (2,386)
Dividends 7 - - - - -
Total comprehensive income
for the period 14 - - 8,760 (855) 7,905
Net assets attributable to
Shareholders at 31 March 2022 1,300 126,314 8,760 (855) 135,519
Called up Share Capital Revenue
share capital premium reserve reserve Total
Notes £'000 £'000 £'000 £'000 £'000
Balance at 24 November 2021 - - - - -
Gross proceeds from share issue 1,721 173,279 - - 175,000
Share issue costs 13 - (3,204) - - (3,204)
Dividends 7 - - - - -
Total comprehensive income
for the period 14 - - 10,120 (1,333) 8,787
Net assets attributable to
Shareholders at 30 September 2022 1,721 170,075 10,120 (1,333) 180,583
The Company's reserves consist of the Capital reserve attributable to fair
value unrealised gains on the Fund portfolio's valuation.
There have been no realised gains or losses at the reporting date.
CONDENSED UNAUDITED STATEMENT OF CASH FLOWS
for the period to 31 March 2023
Period from Period from Period from
1 October 31 August 31 August 2021
2022 2021 to 30
to 31 March to 31 March September
2023 2022 2022
(Unaudited) (Unaudited) (Audited)
£'000 £'000 £'000
Profit for the period from continuing operations 6,012 7,905 8,787
Adjustments for:
Net profit on investments at fair value through profit and loss (5,877) (8,760) (10,120)
Operating cash flows before movements in working capital 135 (855) (1,333)
Cash flows from operating activities
(Increase)/decrease in Trade and other receivables (1,260) (1,066) (852)
(Decrease)/increase in Trade and other payables (579) 638 886
Net cash outflow from operating activities (1,704) (1,283) (1,299)
Cash flows from investing activities
Investing activities
Purchase of investments (31,027) (117,688) (136,171)
Net cash used in investing activities (31,027) (117,688) (136,171)
Cash flows from financing activities
Financing activities
Gross proceeds from share issue - 130,000 175,000
Share issue costs - (2,386) (3,204)
Net cash inflow from financing activities - 127,614 171,796
Net increase/(decrease) in cash and cash equivalents (32,731) 8,643 34,326
Cash and cash equivalents at beginning of period 34,326 - -
Cash and cash equivalents at end of period 1,595 8,643 34,326
The accompanying notes form an integral part of the condensed set of financial
statements.
NOTES TO THE CONDENSED UNAUDITED FINANCIAL STATEMENTS
FOR THE PERIOD TO 31 MARCH 2023
1. Company information
(a) Statutory information
Foresight Sustainable Forestry Company Plc (the "Company" or "FSF"), is a
public limited company limited by shares, was incorporated and registered in
England and Wales on 31 August 2021 with registered number 13594181 pursuant
to the Companies Act 2006. The Company's registered address is The Shard, 32
London Bridge Street, London, United Kingdom, SE1 9SG.
(b) Corporate structure
The Company has one investment, FSFC Holdings Limited, and FSFC Holdings
Limited in turn has one investment, FSFC Holdings 2 Limited; together this is
the "Group".
FSFC Holdings 2 Limited has three investments: FSFC Company 1 Limited,
Blackmead Forestry Limited and Blackmead Forestry II Limited. Blackmead
Forestry Limited has two investments: Coull Forestry Limited and Fordie
Estates Limited. These five entities together are the special purpose vehicles
or "SPVs".
The Group's principal activity is investing in UK forestry, afforestation and
natural capital assets.
The condensed unaudited financial statements of the Company are for the
six-month period to 31 March 2023 and have been prepared on the basis of the
accounting policies set out below. The financial statements comprise only the
results of the Company, as its direct investments in FSFC Holdings Limited,
FSFC Holdings 2 Limited, and all underlying SPVs thereafter, are measured at
fair value as detailed in the significant accounting policies below.
Foresight Sustainable Forestry Company PIc
Foresight Sustainable Forestry Company Pic
FSFC Holdings Limited
FSFC Holdings 2 Limited
FSFC Company 1 Limited Blackmead Forestry Limited Blackmead
Forestry II Limited
Coull Forestry Limited Fordie Estates Limited
2. Significant accounting policies
(a) Basis of preparation
This set of condensed unaudited financial statements has been prepared in
accordance with UK adopted International Accounting Standards. The financial
statements have been prepared under the historical cost convention as modified
by the revaluation of certain assets and on a going concern basis. The
accounting policies set out below have, unless otherwise stated, been applied
consistently to the period presented in these financial statements.
These financial statements have also been prepared in accordance with the
Statement of Recommended Practice: Financial Statements of Investment Trust
Companies and Venture Capital Trusts ("SORP") issued in April 2021 by the
Association of Investment Companies ("AIC").
The same accounting policies and standards have been observed in these interim
financial statements as were applied in the last annual financial statements,
with no change to the nature or effect of these standards' application.
These financial statements are presented in sterling (£) and rounded to the
nearest thousand unless otherwise stated. They have been prepared on
accounting policies, significant judgements, key assumptions and estimates set
out below.
These financial statements do not intend to constitute statutory accounts as
defined in Section 434(3) of the Companies Act 2006 as they are unaudited. As
such, these statements have been neither audited nor formally reviewed.
Statutory accounts in respect of the period to 30 September 2022 have been
audited and reported on by the Company's auditors and delivered to the
Registrar of Companies and included the report of auditors.
No statutory accounts in respect of any period after 30 September 2022 have
been reported on by the Company's auditors or delivered to the Registrar of
Companies.
Any estimates and underlying assumptions are reviewed on a regular basis and
revisions to accounting estimates are recognised in the period when they occur
and in any future period affected. The significant estimates, judgements or
assumptions are set out in Note 10.
These financial statements comprise the results for the unaudited six‑month
period to 31 March 2023 as well as comparatives to the audited period ending
30 September 2022 and unaudited period ending 31 March 2022.
(b) Going concern
The Directors have adopted the going concern basis in preparing the Interim
Report. In their assessment of going concern they have reviewed comprehensive
cash flow forecasts prepared by the Investment Manager and believe, based on
the forecasts and an assessment of the Company's cash position and liquidity
of the investment portfolio, that the Company will continue in operational
existence for at least 12 months from the date of approval of the financial
statements and therefore consider it appropriate to prepare the financial
statements on a going concern basis. As at 31 March 2023, the Company had
net assets of £186.6 million including £1.6 million of cash, it also has
an undrawn £30 million Revolving Credit Facility, held by its indirect
subsidiary, which can be utilised for the Company's working capital
requirements. As such, with all factors mentioned above, the Company's cash
position is considered sufficient to meet all current obligations as they fall
due.
The Directors have also assessed the impact of significant potential risks to
the operations of the Company since incorporation and the principal risks in
the UK forestry and afforestation markets including the various risk
mitigation measures in place and do not consider this to have a material
impact on the assessment of the Company as a going concern.
Market risk
The Company has assessed its potential exposure to being negatively impacted
by a sudden loss of revenue stream. The relevance of this risk has been
significant given the recent impacts made by the COVID-19 pandemic and the
Ukraine‑Russia conflict.
The Company has assessed these risks alongside the potential risk of similar
events having a negative impact on revenue recoverability. The potential
impacts of such market risks include, but are not limited to:
(i) Material reductions in timber prices recoverable from the SPVs
(ii) Material reductions in demand for timber in the United Kingdom
(iii) Material reductions in forecasted revenues earned from the sale of
carbon credits
(iv) Change to the UK Woodlands Grant scheme
Each of the above potential impacts could have a direct influence on the
amount that can be distributed to the Company by its subsidiaries. Foresight
has reviewed the portfolio's exposure to these risks and has concluded that
if, even in the unlikely case, these adverse impacts on revenue recoverability
are material, the Company should still have sufficient funds to continue
operations for the foreseeable future. If such impacts were to continue on a
long-term basis, continued monitoring processes would need to be actioned.
Liquidity risk
Due to the nature of the Company's operation and deployment strategy, there
could be potential exposure to liquidity risk, whereby the entity would
encounter difficulties in paying its financial liabilities. The Directors
have considered this risk and are satisfied that FSF has adequate financial
resources to settle its recurring expenses for the foreseeable future, based
on evidence provided from cash flow forecasting and sensitivity testing to
satisfy both the Investment Manager and the Directors that the Company has
sufficient funds available.
The Directors are satisfied that FSF has sufficient resources to continue to
operate for the foreseeable future, a period of no less than 12 months from
the date of this report. Accordingly, they have adopted the going concern
basis in preparation of these financial statements.
(c) Segmental reporting
The Directors are of the opinion that the Company is engaged in a single
segment of business, being an investor in UK forestry and afforestation
assets, to generate real returns for investors as well as capital
appreciation. The financial information used by the Board to allocate
resources and manage the Company presents the business as a single segment
comprising a homogeneous portfolio.
(d) Key judgements
Fair valuation of investment assets
The market value of the Company's underlying investment portfolio held through
its SPVs consisting of Forestry, Afforestation and Non‑core assets
(investment portfolio/properties) is determined by an external valuer (see
note 10) to be the estimated amount for which an asset should exchange on the
date of the valuation in an arm's‑length transaction. Properties have been
valued on an individual basis. The external valuer prepares their valuations
in accordance with the RICS Valuation - Global Standards July 2017 (the "Red
Book"). Factors reflected comprise current market conditions, including the
comparable market value of similar freehold forestry assets, the potential
uplift in land value above current in‑use value (relevant to planting land),
the location and situation of individual assets, potential vulnerability to
winter storms and the developmental status of properties (if afforestation).
The market conditions stated are assessed on a bi-annual basis. The
significant methods and assumptions used by the external valuers in estimating
the fair value of investment assets are set out in note 10. The carbon credit
valuations are not determined by an external valuer and are subject to
Directors' judgement and estimation.
(e) Taxation
Income taxes
Income taxes represent the sum of the tax currently payable, withholding taxes
suffered and deferred tax. Tax is charged or credited in the statement of
comprehensive income, except where it relates to items charged or credited
directly to equity, in which case the tax is also dealt with in equity.
The tax currently payable is based on the taxable profit for the year.
This may differ from the profit included in the statement of comprehensive
income because it excludes items of income or expense that are taxable or
deductible in other years and it further excludes items that are never taxable
or deductible. To enable the tax charge to be based on the profit for the
year, deferred tax is provided in full on temporary timing differences, at the
rates of tax expected to apply when these differences crystallise.
Deferred tax assets are recognised only to the extent that it is probable that
sufficient taxable profits will be available against which temporary
differences can be set off. In practice, some assets that are likely to give
rise to timing differences will be treated as capital for tax purposes. Given
capital items are exempt from tax under the Investment Trust Company rules,
deferred tax is not expected to be recognised on these balances.
All deferred tax liabilities are offset against deferred tax assets, where
appropriate, in accordance with the provisions of IAS 12. The carrying amount
of deferred tax assets is reviewed at each balance sheet date and reduced to
the extent that it is no longer probable that sufficient taxable profits will
be available to allow all or part of the asset to be recovered.
3. Basis of consolidation
The Company's objective is to invest in UK forestry and afforestation assets
through its holding companies, which will typically issue equity and loans to
finance the investments.
Assessment as an investment entity
IFRS 10 Consolidated Financial Statements sets out the following essential
criterion, necessary for a company to be considered as an investment entity.
Definition of an investment entity/trust:
(i) It must obtain funds from multiple investors for the purpose of
providing its investment management services to those investors
(ii) It must commit to its investors that its business purpose is to
invest funds solely for returns from capital appreciation, investment income,
or both. Similarly, the entity must ensure there is also an exit strategy for
such investments
(iii) It must measure and evaluate the performance of its investments on a
fair value basis
In assessing whether the Company meets the definition of an investment entity
set out in IFRS 10, the Directors note that:
(i) The Company is an investment company that invests funds obtained
from multiple investors in a diversified portfolio of UK forestry and
afforestation assets and has appointed Foresight Group as the Investment
Manager to manage the Company's investments
(ii) The Company's purpose is to invest funds with the intention of
providing real returns to investors and capital appreciation driven by global
demand for timber. The Company's exit strategy will depend on factors of
portfolio balance and/or profit
(iii) The Board evaluates the performance of the Company's investments on a
fair value basis as part of the quarterly management accounts review and the
Company values its investments on a fair value basis driven by a RICS
valuation provided by Savills (the "external valuer") using various
assumptions to reflect current market conditions. This includes, amongst other
factors, the comparable market value of similar freehold forestry assets.
These fair value assessments happen on a bi-annual basis and are included in
the Company's annual and interim financial statements, with the movement in
the valuations taken to the condensed statement of comprehensive income and is
therefore measured within its earnings.
The Directors have concluded that the Company meets the definition of an
investment entity in accordance with IFRS 10 after evaluation of the relevant
criteria.
IFRS 10 states that investment entities are required to hold subsidiaries at
fair value through profit or loss rather than consolidation on a line-by-line
basis; this means that the Group's cash, debt and working capital balances are
included in the fair value of the investment instead of in the Company's
assets and liabilities. The Company has one investee, namely FSFC Holdings
Limited, which invests the funds of the FSF investors on its behalf and is
effectively performing investment management services on behalf of several
unrelated beneficiary investors.
4. Return on investment and interest income
Period from Period from Period from
1 October 31 August 31 August
2022 2021 2021 to 30
to 31 March to 31 March September
2023 2022 2022
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Unrealised fair value movement of investments 5,877 8,760 10,120
Interest income - Loans to direct subsidiary 1,260 100 852
Interest income - Bank 210 - 52
Total 7,347 8,860 11,024
5. Investment management fee
Period ended Period ended Year ended
31 March 31 March 30 September
2023 2022 2022
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Investment management fee 767 380 1,071
Total 767 380 1,071
Foresight Group LLP were appointed as the Investment Manager for the Company
under an Investment Management Agreement. Under the terms of the agreement,
the Investment Manager is entitled to a management fee from the Company, which
is calculated quarterly in arrears at 0.85% per annum of NAV up to £500.0
million and 0.75% per annum of NAV in excess of £500.0 million.
The Company paid £766,714 during the period. No further investment management
fees were billed nor accrued and remained unpaid at period end.
6. Operating expenses
Period from Period from Period from
1 October 31 August 31 August
2022 2021 2021 to 30
to 31 March to 31 March September
2023 2022 2022
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Administration services fee 63 42 104
Director fees paid 100 50 140
Other expenses(1) 404 492 922
Total 567 584 1,166
(1) Other expenses include adviser fees, independent valuer fees, audit
fees, broker fees, depositary fees and other fund related costs.
Details of Directors' fees are set out in note 22.
7. Dividends
The Company did not pay any dividend in the period to 31 March 2023.
8. Taxation
The Company received notice on 11 November 2021 confirming it is an approved
Investment Trust for accounting periods commencing on or after 23 November
2021. The approval is subject to the Company continuing to meet the
eligibility conditions of Section 1158 Corporation Taxes Act 2010.
Furthermore, there are also ongoing requirements for approved companies in
Chapter 3 of Part 2 Investment Trust (Approved Company) (Tax) Regulations 2011
(Statutory Instrument 2011/2999). To maintain its ITC status, the Company must
adhere to the following conditions throughout an accounting period:
(i) The Company must not be a closed company at any time in an
accounting period
(ii) An investment trust must not retain in respect of an accounting
period an amount which is greater than 15% of its income for the accounting
period, and the relevant distribution must be distributed before the filing
date for the investment trust's company tax return for the period
(iii) An investment trust must notify HMRC of a revised investment policy
before the filing date for its tax return for the accounting period in which
the investment policy was revised
(iv) An investment trust must notify HMRC in writing of a breach of any of
the conditions in Section 1158 or any of the requirements in the regulations
as soon as possible after the investment trust becomes aware of the breach
The Company regularly monitors the conditions required to maintain ITC status.
31 March 31 March 30 September
2023 2022 2022
£'000 £'000 £'000
Income taxes - - -
31 March 30 September
2023 2022
Current Period to 31 March 2023 £'000 £'000
Profit before tax 6,012 8,787
Profit before tax multiplied by the rate of corporation tax in the UK of 25% 1,503 1,670
Effects of:
Non-taxable capital profits due to UK approved Investment trust company status (1,469) (1,923)
Non-taxable dividend income
Dividend designated as interest distributions - -
Prior period deferred tax - -
Temporary differences on which deferred tax is not recognised (34) 253
Total income tax charge in the statement of comprehensive income - -
Reconciliation of income taxes in the statement of comprehensive income
The tax charge for the period is different from the standard rate of
corporation tax in the UK, currently 19pc (2022: 19pc), and the difference is
explained below:
The Company's affairs are directed so as to allow it to meet the requisite
conditions to continue to operate as an approved investment trust company for
UK tax purposes. The approved investment trust status allows certain capital
profits of the Company to be exempt from tax in the UK and also permits the
Company to designate the dividends it pays, wholly or partly, as interest
distributions. These features enable approved investment trust companies to
ensure that their investors do not ultimately suffer double taxation of their
investment returns, i.e. once at the level of the investment fund vehicle and
then again in the hands of the investors.
Analysis of tax expense
There was no corporation tax payable during the period to 31 March 2023. As a
result, the tax charge for the period is £nil. Investment gains are exempt
from owing to the Company's status as an investment trust.
Factors that may affect future total tax charges
Following the March 2022 budget, the corporation tax rate will increase from
19% to 25% with effect from April 2023. The Company is recognised as a UK
investment trust for this interim accounting period and is taxed at the main
rate of 19%, prevalent at the reporting period end.
At the period end, there is a potential deferred tax asset of £227,000
carried forward. The deferred tax asset is unrecognised at the period end in
line with the Company's stated accounting policy.
9. Earnings per share
Capital Revenue
reserve reserve Total
£'000 £'000 £'000
Revenue and capital profit attributable to
equity holders of the Company 5,877 135 6,012
Average number of Ordinary Shares issued 172,056 172,056 172,056
Net assets attributable to Shareholders at 31 March 2023 (pence) 3.4 0.1 3.5
Capital Revenue
reserve reserve Total
£'000 £'000 £'000
Revenue and capital profit attributable to equity holders of the Company 8,760 (855) 7,905
Average number of Ordinary Shares issued 130,000 130,000 130,000
Net assets attributable to Shareholders at 31 March 2022 (pence) 6.7 (0.6) 6.1
Capital Revenue
reserve reserve Total
£'000 £'000 £'000
Revenue and capital profit attributable to equity holders of the Company 10,120 (1,333) 8,787
Average number of Ordinary Shares issued 142,847 142,847 142,847
Net assets attributable to Shareholders at 30 September 2022 (pence) 7.1 (0.9) 6.2
10. Investments at fair value through profit and loss
31 March 31 March 30 September
2023 2022 2022
£'000 £'000 £'000
Fair value at start of the period 146,291 - -
Loans to intermediate holding companies 26,500 15,000 21,821
Equity investment in holding companies 4,527 102,688 114,350
Unrealised gain on investments at fair value 5,877 8,760 10,120
Total 183,195 126,448 146,291
There is a loan between FSF and FSFC Holdings Limited for £48,321,230. The
rate of interest on the loan has been set at 7% per annum. Interest accrued at
the period end and outstanding at the reporting date was £2,112,186.
The Company owns 11,887,656,121 shares in FSFC Holdings Limited that was
purchased for a consideration of £0.01.
Fair value investments
The Investment Manager has carried out fair value market valuations of the
underlying SPV investments as at 31 March 2023 as administered by Savills.
The Directors have approved the methodology used, as well as confirming their
understanding of all underlying key assumptions applicable. All SPV
investments are at fair value through profit or loss and are valued using the
IFRS 13 framework for fair value measurement.
Savills includes all investments under ownership by FSF in their portfolio
valuation, for both afforestation and forestry properties. The valuations have
been prepared in accordance with the RICS Valuation - Global Standards July
2017 (the "Red Book") and incorporate the recommendations of the International
Valuation Standards which are consistent with the principles set out in IFRS
13.
Savills, in forming its opinion, makes various assumptions on the basis of
current market conditions; the following are the key assumptions made:
Fair value of assets
x) Savills employs a "comparable approach" by analysing comparable market
value(s) of similar freehold forestry and afforestation assets from recent
transactions, when assessing what fair value is reasonable to attribute to
assets with similar features, held by subsidiaries of FSF
Planting land value
y) Savills includes a reasonable view of the potential for afforestation
sites' value uplift over time, rather than viewing the current value of these
sites as only attributable to their current use as grazing land
z) Savills takes account of the relevant stage each site is currently at
of the forestry grant application process when reaching a judgement
Location and situation
aa) Due to the assets under ownership being located across the UK (Scotland,
North England and Wales), Savills accounts for the potential differences in
market interest associated in different locations
Winter storm vulnerability
bb) Savills makes assessments on the basis of the extent of damage suffered by
sites due to extreme windblow incidents. Where damage is extensive, Savills
will make prudent adjustments to the value of the site, if it is evident that
some of the affected timber may be challenging to recover
Developmental status of afforestation sites
cc) Due to the nature of operations for the afforestation assets, Savills
applies reassessments as to the value of an asset when a new developmental
milestone occurs
The value associated with the carbon credits attached with the establishment
stage afforestation properties is excluded from the RICS Red Book valuation of
these properties. As previously mentioned in the report, value recognition for
carbon credits is ascribed using the Investment Manager's assessment. For
further detail, please see an explanation of the methodology on page 11.
Fair value hierarchy
The Group considers that all of its investments fall within Level 3 of the
fair value hierarchy as defined by IFRS 13. There have been no transfers
between Level 1 and Level 2 during any of the periods, nor have there been any
transfers between Level 2 and Level 3 during any of the periods.
The valuations have been prepared on the basis of market value ("MV"), which
is defined in the RICS Valuation Standards as: "The estimated amount for which
an asset should exchange on the date of valuation between a willing buyer and
a willing seller in an arm's-length transaction after proper marketing wherein
the parties had each acted knowledgeably, prudently and without compulsion."
Market Value as defined in the RICS Valuation Standards meets the requirements
of fair value defined under IFRS.
11. Trade and other receivables
31 March 31 March 30 September
2023 2022 2022
£'000 £'000 £'000
Interest receivable from subsidiaries 2,112 100 852
Other Debtors - 1,118 -
Total 2,112 1,218 852
12. Trade and other payables
31 March 31 March 30 September
2023 2022 2022
£'000 £'000 £'000
Creditors 14 232 477
Accruals 266 558 385
Intercompany Account 24 - 24
Total 304 790 886
13. Called up share capital
Number of
Allotted share capital, issued and fully paid shares
Opening balance at 31 August 2021 -
Allotted upon incorporation
Issue of Ordinary Shares at 1 pence per share (31 August 2021) 1
Allotted since incorporation
Issue of management shares at 1 pence per share (12 October 2021) 50,000
Allotted/redeemed following admission to London Stock Exchange
Ordinary Shares issued at Initial Public Offering (19 November 2021) 130,000,000
Management shares redeemed (50,000)
Total number of Ordinary Shares at 31 March 2022 130,000,001
Allotted/redeemed following admission to London Stock Exchange
Ordinary shares issued at Initial Public Offering (19 November 2021) 130,000,000
Management shares redeemed (50,000)
Ordinary Shares issued on 28 June 2022 42,056,074
Total number of Ordinary Shares at 30 September 2022 172,056,075
Allotted/redeemed (since 01 October 2022)
Ordinary Shares issued -
Management shares redeemed -
Total number of Ordinary Shares at 31 March 2023 172,056,075
Share Share 31 March 31 March 30 September
capital premium 2023 2022 2022
£'000 £'000 £'000 £'000 £'000
Opening balance 1,721 170,075 171,796 - -
Shares issued - - - 130,000 175,000
Costs associated with share issuance - 3 3 (2,386) (3,204)
Cancellation of share premium - (126,259) (126,259) - -
Total 1,721 43,819 45,540 127,614 171,796
At the beginning of the period, the total number of Ordinary Shares in issue
was 172,056,075. Each Ordinary Share has equal rights to dividends and has
equal rights to participate in a distribution arising from a winding up of the
Company. The Company has not issued any further Ordinary Shares.
During the period, there was a special resolution to cancel the share premium
account which was confirmed by court order and registered by Companies House.
The amount cancelled was £126,258,589, with the objective of creating
distributable reserves.
14. Retained earnings
31 March 31 March 30 September
Revenue Capital 2023 2022 2022
£'000 £'000 £'000 £'000 £'000
Opening balance (1,333) 10,120 8,787 - -
Profit for the period 135 5,877 6,012 7,960 8,787
Cancellation of share premium - 126,259 126,259 - -
Dividends paid - - - - -
Closing balance (1,198) 142,256 141,058 7,960 8,787
15. Net Asset Value per Ordinary Share
The total net asset value per Ordinary Share is based on the net assets
attributable to equity Shareholders as at 31 March 2023 of £172,056,075 and
Ordinary Shares in issue of 172,056,075.
31 March 31 March 30 September
2023 2022 2022
NAV (£m) 186.6 135.5 180.6
Number of Ordinary Shares issued (million) 172.1 130 172.1
Net Asset Value per Ordinary Share (pence) 108.5 104.2 105.0
16. Cash and cash equivalents
At period end, the Company held cash and cash equivalents of £1.6 million.
This balance was held by HSBC Bank plc.
31 March 31 March 30 September
2023 2022 2022
Cash and cash equivalents:
HSBC Bank plc - Current account 1,427 8,643 4,283
HSBC Bank plc - Liquidity Fund 168 - 30,043
Total cash and cash equivalents 1,595 8,643 34,326
17. Financial instruments
Financial instruments by category
The Company held the following financial instruments at 31 March 2023. There
have been no transfers of financial instruments between levels of the fair
value hierarchy. There are no non-recurring fair value measurements.
Financial Financial Financial
assets held at assets at fair liabilities
Cash and amortised value through at amortised
bank balances cost profit or loss cost Total
£'000 £'000 £'000 £'000 £'000
Non-current assets
Investments at fair value through
profit or loss (Level 3) - - 183,195 - 183,195
Current assets
Trade and other receivables - 2,112 - - 2,112
Cash and cash equivalents 1,595 - - - 1,595
Total financial assets 1,595 2,112 183,195 - 186,902
Current liabilities
Trade and other payables - - - (304) (304)
Total financial liabilities - - - (304) (304)
Net financial instruments 1,595 2,112 183,195 (304) 186,598
The Company holds its portfolio of assets at fair value. These assets are held
through the Company's underlying subsidiaries/intermediate holding companies
("the Group"). The assets in the Group are valued in accordance with RICS
Valuation - Global Standards July 2017 (the "Red Book") methodology, with
inspections conducted by an independent valuer ("Savills") at the end of the
period.
Savills' fair value assessment of the assets has been completed on a
comparable basis by looking at recent transactions of similar assets, to
assess current market value, outlined in note 10. As a management review
control, the Investment Manager applies discounted cash flow approach ("DCF")
to value the assets and provide a precision level for validation of the fair
value presented by Savills. Whilst the two methodologies differ, the
Investment Manager has recorded an immaterial difference between the
respective portfolio valuation results in both the interim period and the
year-end period.
The Directors consider the DCF methodology used by the Investment Manager to
validate the Red Book valuation to be appropriate. The Board and Investment
Manager annually review the valuation inputs and, where possible, make use of
observable market data to ensure valuations reflect fair value of the assets.
A broad range of assumptions are used in the valuation, which are based on
long-term forecasts and are not affected by short-term fluctuations in inputs,
be it economic or operational.
For management control purposes of comparing the two valuations on a
like-for-like basis, neither the DCF valuation nor RICS valuation conducted by
Savills include explicit recognition of Verified Carbon ("VC") value. The
Manager has therefore calculated an estimated value on the progress made on
obtaining the rights to PIUs. As to date, no PIUs have been authorised by the
Woodland Carbon Code.
Sensitivity analysis of the portfolio
The sensitivity of the portfolio to changes in mature forestry asset valuation
is as follows:
The portfolio valuation of mature forestry and afforestation assets is based
on the RICS Red Book valuation approach. The Directors consider the Red Book
market value of the assets, which is a combination of several factors,
including timber growth rates, weighted age distribution and yield class, to
be the most important unobservable input underpinning the valuation
methodology described on page 47. The Directors believe that the provision of
market value sensitivity analysis of mature forestry, afforestation and mixed
forestry and afforestation assets is appropriate to align with the Company's
portfolio composition.
Mature forestry asset valuation
The sensitivity of the portfolio to changes in mature forestry asset valuation
is as follows:
The independent valuer conducts inspections of all mature forestry assets on a
semi-annual basis, then provides a valuation based on RICS methodology. The
base case used for forestry asset value as at 31 March 2023 was
£77.0 million. Due to this asset class forming significantly more than 10%
of the current portfolio valuation, this was deemed an appropriate
sensitivity to sample.
Changes in
portfolio Changes in
Forestry assets sensitivity valuation NAV per share
Forestry assets value increases by 10% +£7.70m/+4.1% +4.1p
Forestry assets value decreases by 10% -£7.70m/-4.1% -4.1p
Afforestation asset valuation
The sensitivity of the portfolio to changes in afforestation asset valuation
is as follows:
The independent valuer conducts inspections of all afforestation assets on a
semi-annual basis, then provides a valuation based on RICS methodology. The
base case used for afforestation asset value as at 31 March 2023 was £71.8
million. Due to this asset class forming more than 10% of the current
portfolio valuation, this was deemed an appropriate sensitivity to sample.
Changes in
portfolio Changes in
Afforestation assets sensitivity valuation NAV per share
Afforestation assets value increases by 10% +£7.2m/+3.9% +3.8p
Afforestation assets value decreases by 10% -£7.2m/-3.9% -3.8p
Mixed forestry and afforestation asset valuation
The sensitivity of the portfolio to changes in mixed forestry and
afforestation asset valuation is as follows:
The independent valuer conducts inspections of all mixed assets on a
semi-annual basis, then provides a valuation based on RICS methodology. The
base case used for the asset value of mixed forestry and afforestation assets
as at 31 March 2023 was £26.0 million. Due to this asset class forming more
than 10% of the current portfolio valuation, this was deemed an appropriate
sensitivity to sample.
Changes in
portfolio Changes in
Mixed forestry and afforestation assets sensitivity valuation NAV per share
Mixed assets value increases by 10% +£2.60m/+1.4% +1.4p
Mixed assets value decreases by 10% -£2.60m/-1.4% -1.4p
Non-core asset valuation
Due to the relatively small size of the non-core assets in the Company's
valuation, the sensitivity to movement in this part of the portfolio is deemed
immaterial, so no sensitivity analysis has been conducted.
Capital management
The Group, which comprises the Company and its non-consolidated subsidiaries,
manages its capital to ensure that it will be able to continue as a going
concern while maximising the return to Shareholders through the optimisation
of the debt and equity balances. The capital structure of the Group
principally consists of the share capital account and retained earnings as
detailed in notes 13 and 14. The Group aims to deliver its objective by
investing available cash and using leverage whilst maintaining sufficient
liquidity to meet ongoing expenses.
Gearing ratio
The Company's Investment Manager reviews the capital structure of the Company
and the Group on a semi-annual basis. The Company and its subsidiaries intend
to make prudent use of leverage for financing acquisitions of investments and
working capital purposes. Under the Company's Articles, and in accordance with
the Company's investment policy, the Company's outstanding borrowings,
excluding the debts of underlying assets, will be limited to 30% of the
Company's Net Asset Value.
As at 31 March 2023, the Company had no outstanding debt. The Company's
subsidiary FSFC Holdings 2 Limited has a £30.0 million Revolving Credit
Facility, which was undrawn at 31 March 2023.
Financial risk management
The Group's activities expose it to a variety of financial risks: capital
risk, liquidity risk, market risk (including interest rate risk, inflation
risk and power price risk) and credit risk. The Group's overall risk
management programme focuses on the unpredictability of financial markets and
seeks to minimise potential adverse effects on the Group's financial
performance.
For the Company and the intermediate holding companies, financial risks are
managed by the Investment Manager, which operates within the Board-approved
policies. All risks continue to be managed by the Investment Manager.
The various types of financial risk are managed as follows:
Financial risk management - Company only
The Company accounts for its investments in its subsidiaries at fair value, to
the extent there are changes as a result of the risks set out below, these may
impact the fair value of the Company's investments.
Capital risk
The Company has implemented an efficient financing structure that enables it
to manage its capital effectively. The Company's capital structure comprises
equity only (refer to the statement of changes in equity). As at
31 March 2023, the Company had no recourse to debt, although as set out
above, the Company's subsidiary FSFC Holdings Limited is a guarantor for the
Revolving Credit Facility of FSFC Holdings 2 Limited.
Liquidity risk
The Directors monitor the Company's liquidity requirements to ensure there is
sufficient cash to meet the Company's operating needs. The Company's liquidity
management policy involves projecting cash flows and forecasting the level of
liquid assets necessary to meet these. Due to the nature of its investments,
the timing of cash outflows is reasonably predictable and, therefore, is not a
major risk to the Company. The Company was in a net cash position and had no
outstanding debt at the balance sheet date.
Market risk - foreign currency exchange rate risk
All the cash flows and investments are denominated in pounds sterling.
Financial risk management - Company and non-consolidated subsidiaries
The following risks impact the Company's subsidiaries and in turn may impact
the fair value of investments held by the Company.
Market risk - interest rate risk
Interest rate risk arises in the Company's subsidiaries on the Revolving
Credit Facility borrowings and floating rate deposits. Borrowings issued at
variable rates expose those entities to variability of interest payment cash
flows. Interest rate hedging may be carried out to seek to provide protection
against increasing costs of servicing debt drawndown by the holding company as
part of its Revolving Credit Facility. This may involve the use of interest
rate derivatives and similar derivative instruments.
Each investment hedges their interest rate risk at the inception of a project.
This will either be done by issuing fixed rate debt or variable rate debt
which will be swapped into fixed rate by the use of interest rate swaps.
Market risk - inflation risk
Some of the Company's investments will have part of their revenue and some of
their costs linked to a specific inflation index at inception of the project.
In most cases this creates a natural hedge, meaning a derivative does not need
to be entered into in order to mitigate inflation risk.
Market risk - timber price risk
Timber revenue forms a significant majority of forecasted revenues for the
Company's investments. Whilst projections suggest a steady income flow through
the sale of timber, there is a risk that timber prices will drop due to market
forces and minimise the revenues the Fund will receive. This risk is mitigated
by the ability of the Company and underlying investments to sustain its
liquidity, even in the event of withholding from timber sales, given
sub‑optimal pricing.
Credit risk
Credit risk is the risk that a counterparty of the Company or its subsidiaries
will default on its contractual obligations it entered into with the Company
or its subsidiaries. Credit risk arises from cash and cash equivalents,
derivative financial instruments and deposits with banks and financial
institutions, as well as credit exposures to customers.
The Company and its subsidiaries place cash in authorised deposit takers and
is therefore potentially at risk from the failure of such institutions. In
respect of credit risk arising from other financial assets and liabilities,
which mainly comprise of cash and cash equivalents, exposure to credit risk
arises from default of the counterparty with a maximum exposure equal to the
carrying amounts of these instruments. In order to mitigate such risks, cash
is maintained with major international financial institutions. During the
period and at the reporting date, the Company maintained relationships with
HSBC Bank plc.
31 March 31 March 30 September
Moody's 2023 2022 2022
credit rating £'000 £'000 £'000
HSBC Bank plc P1 1,595 8,643 34,326
Total cash and cash equivalents 1,595 8,643 34,326
18. Subsidiaries
The following subsidiaries have not been consolidated in these financial
statements as a result of applying the requirements of "Investment Entities:
Applying the Consolidation Exception (Amendments to IFRS 10)". The Company is
not contractually obligated to provide financial support to the subsidiaries
and there are no restrictions in place in passing monies up the structure.
Name Direct or indirect holding Country of incorporation Registered address Principal activity Proportion of shares and voting rights held
FSFC Holdings Limited Direct UK C/O Foresight Group LLP, The Shard, 32 London Bridge Street, London, England, Holding company 100%
SE1 9SG
FSFC Holdings 2 Limited Indirect UK C/O Foresight Group LLP, The Shard, 32 London Bridge Street, London, England, Holding company 100%
SE1 9SG
FSFC Company 1 Limited Indirect UK C/O Foresight Group LLP, The Shard, 32 London Bridge Street, London, England, SPV 100%
SE1 9SG
Blackmead Forestry Limited Indirect UK The Shard, 32 London Bridge Street, London, England, SE1 9SG SPV 100%
Blackmead Forestry II Limited Indirect UK C/O Foresight Group LLP, The Shard, 32 London Bridge Street, London, England, SPV 100%
SE1 9SG
Coull Forestry Limited Indirect UK C/O Foresight Group LLP, The Shard, 32 London Bridge Street, London, England, SPV 100%
SE1 9SG
Fordie Estates Limited Indirect UK C/O Foresight Group LLP, Clarence House, 133 George Street, Edinburgh, SPV 100%
Scotland, EH2 4JS
19. Employees and Directors
The Company is governed by an Independent and Non-Executive Board of
Directors. There are four Non-Executive Directors. Please refer to the
Directors' remuneration report for details as to the Directors' emoluments.
20. Contingencies and commitments
The Company has no guarantees or significant capital commitments as at 31
March 2023.
21. Events after the balance sheet date
The Directors have evaluated the need for disclosures and/or adjustments
resulting from post balance sheet events through to the date the financial
statements were available to be issued.
There are no other significant events since the period end which would require
to be disclosed. There were no adjusting post balance sheet events, and as
such, no adjustments have been made to the valuation of assets and liabilities
as at 31 March 2023.
22. Related party transactions
Following admission of the Ordinary Shares (refer to note 13), the Company and
the Directors are not aware of any person who, directly or indirectly,
jointly, or severally, exercises or could exercise control over the Company.
The Company does not have an ultimate controlling party.
The transactions between the Company and its subsidiaries, which are related
parties of the Company and fair values, are disclosed in note 10. Details of
transactions between the Company and related parties are disclosed below.
This note also details the terms of the Company's engagement with Foresight
Group LLP, the Investment Manager.
Transactions with the Investment Manager
The Investment Manager, Foresight Group LLP, is entitled to a base fee on the
following basis:
(a) 0.85% per annum of the Net Asset Value of the Fund up to and including
£500.0 million
(b) 0.75% per annum of the Net Asset Value of the Fund in excess of
£500.0 million
The investment management fees incurred during the period to 31 March 2023
were £766,714, of which £nil remained unpaid as at 31 March 2023.
Additionally, the Company incurred fees during the period to 31 March 2023 of
£63,313, which related to administration services provided by the Investment
Manager, in its capacity as Administrator for the Company.
Other transactions with related parties
The amount incurred in respect of Directors' fees during the period to 31
March 2023 was £80,000. The Directors also received £10,000 in
acknowledgement of the time commitment required for Board members pertaining
to the placing programme undertaken in June 2022. The Directors also received
£1,588 in relation to miscellaneous Director expenses. These amounts had been
fully paid as at 31 March 2023. The amounts paid to individual Directors were
as follows:
Basic and
Taxable Committee Fundraising
benefits fees expenses Total
Director £ £ £ £
Richard Davidson (Chair) - 24,000 2,500 26,500
Sarika Patel 167 20,250 2,500 22,917
Christopher Sutton 1,264 17,750 2,500 21,514
Josephine Bush 157 18,000 2,500 20,657
Total 1,588 80,000 10,000 91,588
The Directors held the following shares in the Company:
% of issued
Number of Ordinary
Ordinary Share
Director/PDMR/PCA Shares capital
Richard Davidson (Chair) 100,000 0.06
Sarika Patel 24,000 0.01
Christopher Sutton 25,000 0.01
Josephine Bush 19,000 0.01
The above transactions were undertaken on an arm's-length basis.
Advisers
Investment Manager, Administrator and Company Secretary
Foresight Group LLP
The Shard
32 London Bridge Street
London
SE1 9SG
Registrar and Receiving Agent
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol
BS99 6AH
Depositary
NatWest Trustee and Depositary Services Limited
250 Bishopsgate
London
EC2M 4AA
Sponsor, Global Co-ordinator and Sole Bookrunner
Jefferies International Limited
Exchange House
Primrose Street
London
EC2A 2EG
Public Relations
SEC Newgate
14 Greville Street,
London
EC1N 8SB
Solicitors to the Company
Gowling WLG (UK) LLP
4 More London Riverside
London
SE1 2AU
Independent Auditor
Ernst & Young LLP
1 More London Riverside
London
SE1 2AF
Valuation Adviser
Savills Advisory Services Ltd
Earn House
Broxden Business Park
Perth
PH11 1RA
Glossary of terms
AIC The Association of Investment Companies
AIFMD Alternative investment fund management directive
AIFMs Alternative Investment Fund Managers
AIFs Alternative Investment Funds
APMs Alternative Performance Measures
Asset Manager The Company's underlying investments have appointed Foresight Group LLP, a
subsidiary of Foresight Group CI, to act as Asset Manager
Company Foresight Sustainable Forestry Company Plc
EJDF E.J. Downs Forestry, who have significant experience in the forestry
management space and advise the Company on silvicultural decisions
Ernst & Young LLP Ernst & Young is the Company's auditor
ESG Environmental, Social and Governance
FCA Financial Conduct Authority
FITF Foresight Inheritance Tax Fund
Foresight Foresight Group LLP
FSC Forest Stewardship Council
FSF Foresight Sustainable Forestry Company Plc
Fund Foresight Sustainable Forestry Company Plc
Fund Managers Richard Kelly and Robert Guest
GAV Gross Asset Value on Investment Basis including debt held at company and
subsidiary level
H&S Health and safety
HMRC HM Revenue & Customs
IAS International Accounting Standard
IFRS International Financial Reporting Standards as adopted by the EU
Intermediate holding companies Companies within the Group which are used to invest in afforestation and
forestry assets, namely FSFC Holdings Limited and FSFC Holdings 2 Limited
Investment Manager Foresight Group LLP, appointed by Foresight Group CI Limited
IPO Initial Public Offering
ITC Investment Trust Company
LSE London Stock Exchange
Main Market The main securities market of the London Stock Exchange
NAV Net Asset Value
PEFC Programme for the Endorsement of Forest Certification
Portfolio The 65 assets in which FSF had a shareholding as at 31 March 2023
RICS Royal Institution of Chartered Surveyors
RIDDORS Reporting of Injuries, Diseases and Dangerous Occurrences Regulations
RPI The Retail Price Index
S&ESG Sustainability and ESG
Savills Savills Advisory Services Limited
SDGs United Nations Sustainable Development Goal
SDR UK Green Taxonomy and UK Sustainable Disclosure Requirements
SFDR The EU Sustainable Finance Disclosure Regulation
SORP Statement of Recommended Practice: Financial Statements of Investment Trust
Companies and Venture Capital Trusts
SPV The Special Purpose Vehicles which hold the Company's investment portfolio of
underlying operating assets
TCFD Task Force on Climate-related Financial Disclosures
UK The United Kingdom of Great Britain and Northern Ireland
VCM Voluntary Carbon Market
WCC UK Woodland Carbon Code
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