NextEnergy Solar Fund: attractions beyond the dividend

The NextEnergy Solar Fund has an extremely attractive dividend policy and provides investors with a yield far in excess of the benchmark. However, the attractions of the trust run deeper than the dividend, providing investors with unrivalled exposure to UK solar power assets.

A major player in the UK’s solar power generation industry with 90 solar assets across the UK, the renewable infrastructure trust also has international holdings in Europe and India.

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The trust has deployed significant capital into the energy transition and has a gross asset value of around £1.2bn and a net asset value of £640m.

NextEnergy Solar Fund is managed by NextEnergy Capital, one of the world’s largest solar investors, with around $3.9bn in assets. NextEnergy Solar Fund benefits from the deep expertise of 300 investment professionals focused on clean energy, making it a uniquely positioned Investment Trust.

The management team’s experience in the solar industry is demonstrated by the evolution of capital allocation during the existence of the trust in response to a changing regulatory environment. The portfolio contains some of the UK’s earliest government-subsidised solar installations generating long-term inflation-linked revenues and newer assets designed for the post-subsidy era.

Diversified portfolio

NextEnergy has consistently invested in new assets through the 10-year life of the fund, and the latest post-subsidy assets utilise the latest solar technology without any government subsidies. Revenues are generated from power purchase agreements with corporates with the help of contracts-for-difference to stabilise cash flows. NextEnergy will also trade the power generated from newer assets in the open market.

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The portfolio is split between direct investment solar assets, co-investment and a $50m investment in a fund providing geographical diversification.

The majority of the portfolio is allocated to direct investments in the UK managed directly by the NextEnergy team. Of the trust’s 100 directly held assets, 90 are in the UK and eight in Italy.

The trust achieves overseas exposure through the $50m investment in NextPower III ESG, which invests in solar projects globally. NextEnergy Solar Fund has co-invested directly with the fund into solar assets in Spain and Portugal.

UK investors will be hard-pressed to find another investment vehicle offering the same solar asset diversification and NextEnergy Solar Fund’s expert management.

It operates some of the UK’s largest facilities, ranging from the 9MW capacity Gover Farm installation in Cornwall to the 4.8MW capacity Balhearty asset in Scotland.

The trust’s total capacity is 933MW. To put this into context, the UK’s total solar capacity was around 15,000 MW in 2023, according to trade body Solar Energy UK.

The NextEnergy Solar Fund Opportunity

Amid a sector trend of renewable infrastructure trusts trading at substantial discounts to NAV, the NextEnergy Solar Fund trades at a 23% discount to NAV.

Speaking to UK Investor Magazine in early 2024, Ross Grier, COO & Head of UK Investments, NextEnergy Capital, said; ‘there is nothing within the fundamentals of the platform that could justify the discount.”

This is a major vote of confidence by someone at the forefront of managing the trust and calculating the portfolio’s NAV.

NextEnergy has spent a decade optimising ‘robust’ NAV calculations they feel are entirely representative of the trust’s value. These calculations are audited on a regular basis.

The discount is almost entirely the result of the higher interest rate environment, and there’s a strong argument that when rates start to fall, the NESF will rerate accordingly.

However, instead of waiting for interest rates to fall, the trust is taking active steps to recycle capital to pay down an interest-rate-sensitive revolving credit facility to bolster its capital structure.

Taking these steps now will likely feed through to better performance for investors as interest rates are reduced later this year.

Although there is a substantial gap between the share price and NAV and a material opportunity for this to narrow exists, much interest in NextEnergy will derive from the 8% dividend. 

Dividend yields above 6% should always be treated with caution, but nothing here suggests any disruption to payments on the horizon.

Indeed, the trust increased the dividend by 11% recently so that investors will receive 8.35p for the full year, and everything points to dividends rising in the future.

The trust has increased the dividend in line, or above, inflation in each year of existence.

The trust targets a 1.3x dividend cover in 2023/24. This leaves plenty of space for payout increases thereafter.

With a current share price of 82.1p, NESF represents deep value and market-beating sustainable yields.

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