The NextEnergy Solar Fund’s share price has softened slightly since the Investment Trusts announced net asset value fell marginally due to energy price forecasts.
The trust regularly updates the valuation of its portfolio of solar assets to reflect the discount rates and expected future cash generation.
Looking past the short-term gyrations in underlying energy markets, we explore three factors central to the NextEnergy Solar Fund investment case.
NextEnergy Solar Fund yields 12%
The NextEnergy Solar Fund is a dividend juggernaut. The trust has consistently increased its dividend and is on track for another year of growth. The full-year dividend is expected to increase to 8.43p for the year ending 31 March.
Highlighting the sheer scale of the dividends distributed by the NextEnergy Solar Fund, the trust has paid out £370m in dividends totalling 72p since its IPO. This compares to a current share price of 69p and a market cap of £400m.
Dividend yields above 10% are treated with scepticism. However, the NextEnergy Solar Fund has set a dividend cover target of 1.1x -1.3x for the full-year dividend, meaning the dividend paid is more than covered by income, reducing the risk of any reduction in the dividend payout.
The income that covers the dividend is remarkably reliable. A common misconception is that solar power heavily depends on the weather and how bright the sun shines. Of course, the weather has a degree of variability, but its impact on a solar facility’s ability to generate power is minimal. NextEnergy Solar Fund uses Power Purchase Agreements to lock in prices for the power it generates and provide income security.
Share buybacks
The NextEnergy Solar Fund’s commitment to share buybacks further underpins its attraction. The trust has a programme of up to £20m, of which £6.2m was utilised up to 20 November 2024.
The share buyback programme isn’t massive, but the fact that one is in place demonstrates the underlying health of the trust’s finances, adding an extra layer of reassurance to its ability to pay dividends.
Share buybacks are currently playing a major part in shareholder returns for UK equity investments, and investors should be encouraged to see NextEnergy committed to a programme.
Asset sales at a premium to book value
NextEnergy Solar Fund shares trade at 29% discount to NAV. Wide discounts are a common theme across renewable infrastructure Investment Trusts. However, recent asset sales as part of NextEnergy’s capital recycling programme reinforce why their discount is unjustified.
Discounts across the sector partly reflect the higher interest environment and partly reflect concerns about a potential disparity between the achievable valuation of assets and the reported valuation.
Concerns about the achievable valuation of NextEnergy Solar Fund’s assets may be misplaced. As part of its capital recycling programme designed to manage its exposure to higher interest rates, NextEnergy has disposed of a limited number of assets at a premium to their holding value, delivering a 2.76p uplift in the trust’s NAV.
This highlights two things: first, NextEnergy Solar Fund NAV calculations have proven conservative compared to the price acquirers are prepared to pay, and second, any discount to NAV due to the trust’s portfolio’s achievable NAV could be unwarranted.
In addition to the benefits outlined above, investors must consider the risks, as with all investment trusts. NextEnergy Solar Fund is exposed to power prices that can be unpredictable, and there is an element of exposure to inflation through subsidies.