Fund Profile

Disclaimer

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by NextEnergy Solar Fund. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Overview
NESF’s broader investment remit is designed to future-proof its attractively high dividend…
Overview

NextEnergy Solar Fund (NESF) invests primarily in long-life solar power generating assets, with the majority of the total return coming through a high dividend, with a yield currently of 7.1% on the share price. The renewable space has seen increasing waves of capital enter, with net zero and post-pandemic infrastructure commitments only increasing the pace. In order to continue to drive growth whilst maintaining the level of returns on new investments, improve the diversification of risks and revenue sources, and protect dividend cover, NESF is broadening out its geographic scope and asset mix and is venturing into private funds.

Historically the portfolio has been invested mostly in the UK with significant holdings in Italy. In June, NESF announced an investment of $50m (3.5% of GAV) in NextPower III (NPIII), a private fund with solar assets in various OECD countries. As we discuss in Portfolio, this investment is intended to increase the return potential and dividend cover as well as provide diversification. The manager has identified opportunities to increase the exposure to the battery storage market too, where attractive returns are available in a critical piece of renewable energy infrastructure.

In the year to March 2021 NESF raised the dividend despite the turmoil in the power price markets caused by the pandemic and lockdowns, and the dividend remains covered. As we discuss in Dividend, the board is targeting an increase next year too. The majority of NESF’s revenues are fixed due to subsidies or forward purchase agreements (hedges) to fix the price of power being sold, with the manager employing a dedicated trader who was able to boost the income earned last year through NESF’s rolling hedging strategy.

NESF’s yield is boosted through the strategic use of Gearing. The trust has £200m in preference shares as well as gearing at the asset level and revolving credit facilities. As of the end of March, debt was 43% on a GAV basis (75% of NAV). The trust trades on a 3.2% premium to NAV.

Analyst's View

NESF offers an attractively high yield, largely inflation-linked, from an investment in an asset class with strong ESG credentials. The past year has been a difficult one for the sector given the volatility in the power price. In the short term the manager has clearly handled it well in our view, with their hedging decisions in particular adding value. Their long-term strategy for dealing with diminishing returns in the UK solar market seems sound, building on the manager’s experience and expertise and taking full advantage of opportunities presented by their broader business with the investment in NPIII.

After a rough year we can see some potential tailwinds for NAV and the share price: if the manager is right that the market is too pessimistic on future power prices it could mean NESF stands to benefit as this is realised. Secondly, if the new investments provide a higher dividend cover, it could lead to improved sentiment towards the trust.

Risks remain, of course, and a structural decline in power prices would be problematic for NAV. High gearing levels would increase the sensitivity of NAV to this development. However, the 3.2% premium to NAV is low relative to the peer group and to NESF’s own history, which potentially reduces the risks to the share price somewhat.

Bull bear
Highly attractive yield, with substantial proportion inflation-linked High levels of debt (although these remain comparable with sector peers)
Contributes to the renewables industry, supporting key ESG concerns of many investors Despite drive to diversify, retains key risk exposures to the UK and the power price
Expertise of manager is well-established with advantages for acquisitions and ongoing management Dividend cover not high (around 1.1x), although manager making moves to increase it
Continue to Portfolio

Welcome to Kepler Trust Intelligence

Kepler Trust Intelligence is authorised in the UK by the Financial Conduct Authority.
Please enter a valid email address
{{item.msg}}
Please enter a valid password
{{item.msg}}
Please enter a valid email address
{{item.msg}}
Please check your email. If an account exists you'll be sent instructions on how to reset your password.
Kepler Trust Intelligence is authorised in the UK by the Financial Conduct Authority. To ensure that we are able to provide content which is appropriate for you, please tell us a little about yourself.
Please choose an option
{{item.msg}}
Please enter a company name
{{item.msg}}
Please enter a location name
{{item.msg}}
Please choose an option
{{item.msg}}
Please enter a platform
{{item.msg}}
Please choose an option
{{item.msg}}
Please enter a trust
{{item.msg}}
?
The information contained herein is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States to or for the benefit of any United States person (being residents of the United States or partnerships or corporations organised under the laws thereof). The investment funds referred to herein have not been registered in the United States under the Investment Company Act of 1940 and units or shares of such funds are not registered in the United States under the Securities Act of 1933.
Please confirm
{{item.msg}}
Please select an option
{{item.msg}}
See benefits
A free Kepler Trust Intelligence account allows you to access premium content including the ‘Kepler View’ – our verdict on the trusts we cover – and historical research so you can see how our view has changed over time. An account also unlocks useful facilities like the ‘follow’ button which lets you keep track of the trusts you’re interested in and as a logged in user you can also download PDFs of our research, and choose the layout of the page you’re reading to suit your preference. We will not share your details unless you give us permission to do so, and we won’t bombard you with emails – we only send one a week.
Please select an option
{{item.msg}}
Please enter your first name
{{item.msg}}
Please enter your last name
{{item.msg}}
Please enter a valid email address
An account already exists with this email - have you forgotten your password?
{{item.msg}}
Please enter a valid password
{{item.msg}}
Please enter a valid password
{{item.msg}}
How will this information be used? Your answers help us to tailor our content to relevant investment trusts, and to ensure that the asset allocation and portfolio strategy research we produce is appropriate to our userbase.
Our Website uses Cookies Cookies are small text files held on your computer. They allow us to give you the best browsing experience possible and mean we can understand how you use our site. Some cookies have already been set. You can delete and block cookies, but parts of our site won’t work without them. By using our website you accept our use of cookies. For further information please refer to the Kepler Privacy Notice.
Need help?

One more thing...

Did you know, you can 'follow' individual trusts on Kepler Trust Intelligence? Use the functions below to set up alerts and we'll send you research and updates on your chosen trusts.

Suggested trusts to follow

Browse all funds
Need help?
Current Site Kepler Trust Intelligence is produced by the investment companies team at Kepler Partners and is the UK’s premier source of detailed qualitative research on investment trusts. Absolute Hedge is a market leading UCITS research database providing proprietary research on funds, themes and strategies in the UCITS space. Kepler Liquid Strategies is a Dublin domiciled UCITS fund platform featuring a number of best-of-breed fund managers. Kepler Partners is a corporate advisory and asset raising boutique specialising in the regulated funds market in Europe and investment trusts in the UK.