Shares in NextEnergy Solar (NESF) have tumbled nearly 5% after the high-yielding renewables fund disclosed another quarterly fall in net asset value (NAV) that pushed its level of borrowing close to a 50% cap that analysts said could restrict its room for manoeuvre.
A valuation decline for the three months to 30 June was expected after a string of other renewables funds had reported hits to NAV from a reduction in long-term power price forecasts that cloud future revenue prospects. However, a 3.6% drop in NAV per share to 91.7p from 95.1p at 31 March due to a “material change” in its four independent energy consultants’ forecasts was larger than anticipated given that it is wind funds that have generally reported bigger hits to NAV as a result of low wind speeds.
Figures from the company show that of the £20.2m fall in the solar and battery portfolio to £527.2m, over half, or £12.4m, was due to the impact of lower power prices. This accounted for 2.2p in the 3.4p decline in NAV per share.
However, nearly half of the valuation fall, £9.2m, or 1.5p NAV per share, was the result of “other movements” which include provisions for maintaining or repairing assets as well as currency fluctuations and fund operating expenses.
The quarterly decline was disappointing after annual results in June showed a 9.2% fall in the portfolio in the year to 31 March. This takes the total decline over 15 months to around 13%.
“The scale of the reduction in NAV from ‘other movements’ is likely to reflect higher asset health provisions (eg replacing inverters) but its scale is surprising,” said Winterflood analyst Ashley Thomas, who pointed out this category had contributed a 0.4p NAV per share gain in the March quarter and detracted 0.3p per share in the June quarter last year.
There was some good news in the update. Sunny weather in the UK saw irradiation levels come in 18.9% above budget in the company’s first quarter, although after accounting for electricity network outages this resulted in electricity generation only 7.6% above budget. This contributed a 0.5p uplift to NAV per share to mitigate some of the downward pressures on the portfolio.
The 11%-yielder is also on track to pay an unchanged dividend of 8.43p for the year to 31 March 2026, covered 1.1 to 1.3 times by earnings.
However, the shares slid 4.5%, or 3.3p, to 69.9p after broker Stifel downgraded the company from “neutral” to “negative” saying the NAV decline was “concerning” especially as the fall in the asset based “pushes up the leverage ratio”. Borrowing of £497m now represents 48.5% of gross assets, up from 47.3% in March, and closer to a 50% ceiling above which it cannot make new investments and could restrict its £20m share buyback programme.
The company said 69% of its debt, including £198.5m of preference shares, charged a fixed rate of interest with £152.9m drawn on its short-term credit facility paying a floating rate of interest.
“Whilst there may eventually be some cash received from disposals, there is little headroom here and if there are further NAV falls, this limit may become restrictive on making further investments,” said analyst Iain Scouller, who believed the share price discount could widen to 30% from 22% yesterday. That would push the shares to 64p, he said.
Before today, NextEnergy Solar shares had rallied 24%, narrowing their discount from a 12-month low of 39%, a relative re-rating that Deutsche Numis analyst Colette Ord called a “step change” for the company. However, she suggested for the improvement to continue shareholders would need “greater comfort” on the earnings outlook and further asset sales to validate valuations and reduce debt.
Today’s update showed the company had 91% of its revenues in the current financial year fixed through RPI inflation-linked government subsidies and power purchase agreements. These currently fall to 70%, 60% and 62% in the following four years up to 2030.
NextEnergy Solar has raised £72.5m in three disposals under a capital recycling programme launched two years ago but has not achieved a sale since last November.
Paul Le Page, interim chair, said: “The board remains committed to reviewing all options available to maximise value for shareholders.”
The company said it was engaging with shareholders after just over 12% of votes were cast in favour of discontinuation at the annual general meeting yesterday.