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NextEnergy Solar Fund – Well covered, growing, double-digit yield

• QuotedData
• NextEnergy Solar Fund : NESF
• Matthew Read

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 has opened up, bringing with it significant yield expansion – NESF now has the second-highest yield in the FTSE 350 – despite its dividend being 1.3x cash-covered during FY2024, with a coverage target of 1.1x – 1.3x for FY2025 on a higher target dividend.

NESF has been making progress with its capital recycling programme (see page 7), with the proceeds used to reduce debt and fund share repurchases that, at current discount 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 IPO, NESF has paid £370m of ordinary dividends – roughly its market cap – highlighting its strength as a total return play.

Year ended	Share price TR (%)	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				8.4322	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 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 carry. This is a differentiating factor for NESF versus its peers.

Battery storage

Camilla 50MW standalone battery project online

Since we last published, NESF has brought Camilla, its first standalone battery project, online. This is also the first project from its JV with Eelpower (the JV is 70% owned by NESF and 30% by EelPower). The 50-MW lithium-ion BESS asset, located in Edinburgh, is a one-hour battery, but has been pre-augmented for two hours so any upgrade to this should be plug-and-play. BESS assets have a very different revenue stack to solar, and this asset is very complimentary to NESF’s existing portfolio (BESS asset revenues are much volatile but can be much higher than those from solar, which is very stable). With its investment in NextPower III, NESF has exposure to 1.8GW of batteries. NESF’s manager highlights that it is the only renewable generator that has a utility scale battery online at present and that this is approaching its one-year operating anniversary in March 2025.