NextEnergy Solar Fund Ltd attractive for its sustainable and growing

On Jan 25, 2022

The sector should also be supported by a constructive short- and long-term outlook for power prices, due to fundamental changes in the industry from both demand and supply factors, the analyst said

NextEnergy Solar Fund Ltd (LSE:NESF) is a “highly attractive investment proposition” said house broker Cenkos as it initiated coverage.

The London-listed investment trust provides investors with “a well-covered, sustainable and growing dividend”, the broker said in its note to clients, underpinned by a “highly visible income stream, a conservative balance sheet and high return growth opportunities globally”.

NESF should also be supported by a “constructive” short- and long-term outlook for power prices, due to fundamental changes in the industry from both demand and supply factors, said analyst Samir Shah.

First and foremost, he noted the drive to become a carbon neutral economy by 2050 will have “material implications” for the energy system, with demand levels for electricity in particular set to rise due to the electrification in transportation, manufacturing and the wider environment.

“This increase in demand is set to be met by more sustainable sources with the solar industry being at the forefront of this change.”

In the near term, headlines are also being made daily about rising spot power prices that Shah said have reversed some of the headwinds faced by the fund since launch.

After the 2020 expansion of the investment policy to allow for broader geographic exposure and into projects with higher risk-adjusted returns, the fund has made several subsequent deals including a US$50mln investment into the NextPower III private fund run by manager NextEnergy Capital and a £100m joint venture with energy storage specialist Eelpower to explore opportunities within battery storage.

Despite a current yield of 7.0% and an estimate 2022 dividend of 7.2p which is expected to be 1.3x covered, the shares trade at small discount compared to premium of almost 10% for the wider renewables sector.

“We believe that the strength and breadth of the investment management team coupled with recent investments into battery storage and more global exposure makes NESF a highly attractive investment proposition,” said the analyst.

“We also note the financial stability provided by the preference shares which help provide an attractive dividend yield together with an inflation link on the majority of NESF’S cash flows and compelling ESG credentials.”