Shares in NextEnergy Solar (NESF), the £279m renewables fund that disappointed investors with a dividend cut in March, fell again today after the company revealed a 10.4% fall in net asset value (NAV) in the first quarter.

The worse-than-expected decline saw NAV per share drop 8.8p to 76.1p from 84.9p, although with the quarterly 2.5p dividend included the total loss was reduced to 7.4%.  

Some of the hits to NAV were known, such as 2p per share off from the government’s changes to the inflation measure used in subsidies to renewable power generators, or not unexpected, such as the 1.5p negative impact from lower generation and power price forecasts and 1.6p deducted from lifting the discount valuation rate in line with rising government bond yields and interest rates.

However, a 1.3p per share write-down to a development asset that NESF is selling and a 0.5p per share reduction in its investment in NextEnergy III, an international fund run by its fund manager, were not anticipated.

Chair Tony Quinlan said: “This has been a very difficult period for the sector, NESF and for our shareholders. The wider renewables backdrop has been uncertain, and recent government consultations and announcements have not helped to provide the clarity the sector needs and therefore had a detrimental effect on the company’s net asset value.”

However, Quinlan said the reduction in the dividend from 8.43p to 4.5p-5.1p per share for the current year to 31 March 2027 would strengthen the balance sheet and enable NESF to deliver long-term growth.

“Today’s NAV is a technical measure, taken at a point in time, but certainly not reflecting the substantial upside optionality inherent in the portfolio,” he said.

NESF shares fell 3.8% or 1.9p to 46.6p. They peaked at 122p in September 2022 before interest rates spiked in response to Russia’s invasion of Ukraine.

Our view

QuotedData senior analyst Matthew Read said: “While NESF’s update is a difficult read for shareholders, the causes behind its NAV fall are well understood – a combination of government policy changes, higher discount rates, weaker long-term capture price assumptions and a write-down on a development asset – and it does draw a line under some of the uncertainty that has weighed heavily on the share price.

“The dividend reset was painful for income investors, but we still think that this makes sense in the current market backdrop. Moving to a 75% payout of operating free cash flow should make the dividend more sustainable, retain more capital within the business, help reduce gearing and put the business on a better footing going forward.

“Repairing the balance sheet remains a priority and NESF has already completed disposals, reduced its RCF and is targeting further sales to bring gearing down to 40%–45% of gross asset value. The portfolio is still made up of long-life, cash-generative solar and storage assets, and there may be upside from repowering, batteries and future policy changes such as voluntary wholesale CfDs. However, if NESF can demonstrate that the strategic reset can stabilise NAV and therefore rebuild confidence, the discount has the potential to narrow meaningfully.”