NextEnergy Solar Fund -Well covered, growing, double-digit yield
- 16 January 2025
- QuotedData
- Investment Companies
- Renewable energy infrastructure
- NextEnergy Solar Fund : NESF
- Matthew Read
1
Well covered, growing, double-digit yield
Despite having many attractive features, NextEnergy Solar Fund (NESF) has seen its share price derate significantly during the last two years (driven largely by macroeconomic headwinds, such as the impact of higher interest rates on income-producing assets, which has affected the whole renewable energy sector and has been a factor again very recently). A hefty and, in our view irrational, discount to net asset value (NAV) has opened up, bringing with it significant yield expansion – NESF now has the second-highest dividend y in the FTSE 350 – despite its dividend being 1.3x cash-covered during its financial year ended 31 March 2024 (FY2024), with a coverage target of 1.1x – 1.3x for the year ending 31 March 2025 (FY2025) on a higher target dividend.
NESF has been making progress with its capital recycling programme (a strategy that involves selling assets and reinvesting the proceeds into higher-returning opportunities) (see page 8), with the proceeds used to reduce debt and share repurchases that, at current discount to NAV levels, are very NAV-accretive. The final phase for 100MW of assets could prove transformational.
Income from solar-focused portfolio
NESF aims to provide its shareholders with attractive risk-adjusted returns, principally in the form of regular dividends, by investing in a diversified portfolio of primarily UK-based solar energy infrastructure and complementary energy storage assets. Since its initial public offering (IPO), NESF has paid £370m of ordinary dividends – roughly its market cap – highlighting its strength as a total return play.
At a glance
Share price and discount
There has been a clear impact on NESF’s discount, which has widened in response to rising interest rates. Recent figures have shown inflation, while much reduced over the last couple of years, to be more stubborn than was expected even in the middle of last year. This has, at the margin, extended the higher interest rates for longer narrative, which has weighed on the discounts of all of the renewable energy funds, NESF included – leaving them all close to or at long-term discount highs.
Time period 31 December 2019 to 15 January 2025
Source: Morningstar, Marten & Co
Performance over five years
The end-September NAV was 97.8p – down from 101.3p as at the end of June, 107.3p at end March 2024 and 107.7p as at end December 2023. On the positive side, time value, the sale of Whitecross, share buybacks and the revaluation of NextPower III added 7.7p, 0.6p, 0.2p and 0.1p respectively. NESF’s weighted average discount rate stands at 8.1%, having moved up by 0.1% for 31 March 2024 valuation.
Time period 31 December 2019 to 31 December 2024
Source: Morningstar, Marten & Co
| Year ended | Share price total return (%) | NAV total return (%) | Earnings per share1 (pence) | Dividend per share (pence) | Cash dividend cover (x) |
|---|---|---|---|---|---|
| 31/03/2021 | 4.9 | 7.2 | 6.32 | 7.05 | 1.1 |
| 31/03/2022 | 11.4 | 23.1 | 17.34 | 7.16 | 1.2 |
| 31/03/2023 | 8.2 | 7.2 | 7.55 | 7.52 | 1.4 |
| 31/03/2024 | (25.1) | (1.4) | (1.42) | 8.35 | 1.3 |
| 31/03/2025 | 8.432 | 1.1-1.33 |
Source: Morningstar, Marten & Co. Note 1) Fully diluted. 2) Target dividend for FY2025. 3) Forecast cash coverage of target dividend as per the company’s announcement on 15 May 2024.
Portfolio update
Spanish and Portuguese co-investments energised
NESF has invested $50m in NextPower III ESG – a private solar infrastructure fund that owns international solar assets – that targets gross IRR between 13 and 15% on its investments. This is significantly above the level that UK solar funds are offering.
Shortly after we last published, NESF announced that its first two international solar co-investments, in which it invested alongside NextPower III ESG, had been energised. The assets are a 210MW solar project in Portugal (Santarém) and a 50MW solar asset in Cadiz, Spain (Agenor). NESF directly owns 13.6% of Santarém, 24.5% of Agenor, and 6.21% of NPIII ESG. Both assets have long-term PPAs (power purchase agreements) with Statkraft (Santarém’s PPA is the largest in Portugal’s history).
NESF’s manger highlights that the investment in NextPower III ESG gave NESF instant international diversification (the fund owns development-stage and operational assets in OECD countries), removing the need for NESF to have its own teams on the ground around the world. NextPower III ESG now has 102 operating assets, and the co-investment opportunities that NESF is able to access have the additional benefits of no management fee and no carried interest (carry). This is a differentiating factor for NESF versus its peers.
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