NextEnergy Solar Fund (NESF)
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NextEnergy Solar Fund (LON: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.
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