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Another sunny year for NextEnergy Solar

NextEnergy Solar Fund (NESF) has released its annual report for the financial year ending 31 March 2023. Highlights are:

  • NAV growth of 0.9%, with a NAV per share of 114.3p, as of 31 March 2023 (a breakdown of the major factors influencing the NAV is shown below).
  • An NAV total return of 7.3% and a return to shareholders of 8.6% for the year.
  • NESF shares traded on a 8.3% discount as of the end of its finanical year, with its discount subsequently trending downward and NESF currently trading on a 12.0% discount.
  • A total dividend of 7.52p per share was declared for the period, up from the 7.16p of the prior financial year. This was covered 1.4 times by NESF’s underlying revenue, also up from the 1.2 times of the prior year. We note that NESF has a current share price yield of 8.3%.
  • NESF is targeting an 11% increase in dividends for its next financial year, increasing to 8.35p per share. Forecast dividend cover is 1.3x–1.5x, most of which (1x–1.1x) comes from fixed revenues.
  • NESF utilised a weighted average discount rate of 7.3% to value its portfolio at the end of the period, a 1% increase on that used at the end of its previous financial year, reflecting the increase in interest rates across all markets.
  • While there were no additional operating assets within its portfolio (the number of operational assets remaining at 99), total operating capacity has increased from 884 MW to 889MW.
  • NESF’s portfolio generated an additional 3.8% performance above its budgeted target, adding £4.8m to its revenues.

NAV evolution over the year

113.5     From an opening NAV of 113.5p,

-1.3     1.3p was deducted to correct for the treatment of VAT.

+16.3   16.3p (value at cost) of new assets were included within the portfolio

-11.9    11.9p was drawn down from the revolving credit facility

-4.4      and 4.4p of cash was used to fund investments

+14.6   higher power prices added 14.6p

-7.2      dividends took off 7.2p

-7.0      the higher discount rate used to value the portfolio took off 7.0p

+5.6     higher inflation than budget added 5.6p

-2.3      provisions of 2.3p were made

-1.6      other movements, including preference share dividends and operating expenses took off 1.6p


Portfolio developments

Several new investments were made over the year.

  • A $50m investment into a private solar infrastructure fund, NextPower III ESG, targeting IRRs of between 13-15%.
  • Two solar co-investments totalling 260MW alongside NextPower III ESG (a 13% stake into a 210MW solar asset in Portugal and a 25% stake into a 50MW solar asset in Spain).
  • NESF has begun construction of its first standalone 50MW battery storage project, due to be energised this year. It has also acquired the development rights for a high-quality 250MW lithium-ion battery storage project in the East of England.

NESF has also introduced some higher-level strategic initiatives. One example is a Capital Recycling Programme, whereby NESF will unlock shareholder value by selling a 236MW subsidy-free portfolio, and using the proceeds to reduce gearing, investing in higher yielding opportunities, or potential buyback of its shares. The assets to be sold are across five projects, all in the UK but at varying levels of operational capacity.

Other initiatives include the launching of its Energy Storage Strategy, which will raise NESF’s investment limit in energy storage from 10% to 25% of gross asset value. NESF has also formed two joint venture partnerships with Eelpower Limited, a specialist in the battery sector targeting a £300m pipeline of UK energy storage opportunities. NESF will also implement a retrofit programme to add co-located battery storage assets to its existing solar assets.

NESF has also made strides in improving the ESG credentials of the trust. NESF is classified as an Article 9 fund under the EU Sustainable Finance Disclosure Regulation and EU Taxonomy Regulation, the most onerous classification of funds for ESG and sustainability. NESF has also become a forum member of the Taskforce on Nature-related Financial Disclosures, which will require NESF to make far more detailed sustainability disclosures. To that end NESF has released its first standalone sustainability report, as well as a biodiversity position statement.

QD comment: [“Another solid year for NESF, providing investors what they have come to expect from the fund – a reliable dividend and continued, albeit modest, NAV growth. Though in the context of a tumultuous global market, an 8.6% shareholder return is not to be sniffed at.

While we did not expect any vast capital deployment by NESF, given the maturity of the strategy, it is encouraging to see that its managers have found more innovative ways to diversify and renew NESF’s asset base, be it the capital recycling initiative, investment in a private infrastructure fund, the construction of its first standalone battery, or investing alongside other infrastructure managers through minority stakes in European solar assets. It is these kinds of innovations that we look for in professional investment managers, actions which (we hope) continue to ensure the relative attractiveness of NESF when compared to strategies of a similar risk profile.

This diversification and innovation has become more important than it may initially seem. Firstly, because we may have reached the end of extremely high power prices and associated NAV uplifts. With a repeat of 2021 and 2022 unlikely, bar another earth-shattering event like the war in Ukraine, innovation and efficiency savings will become all the more important.

Secondly, in a world where cash yields c.4%, risk-adjusted returns must reflect this. NESF’s prospective 8.3% yield is the highest in its sector and comes on the back of one of the highest dividend target increases of its peers. We feel NESF has done more than enough to tick this box.

Finally, there will be increasing pressure on the managers and boards of infrastructure trusts to close their discounts. Near-term narrowing may be unlikely without action being taken by boards and management.

Consequently, the board decision to create shareholder value through the use of its new Capital Recycling Programme could not have come at a better time. This is exactly what NESF needs and could deliver tangible results to shareholders. As part of this, the board has said that share buybacks are a possibility, which could be the shot-in-the-arm the trust needs to see a material re-rating of its shares. “]

NESF : Another sunny year for NextEnergy Solar

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