SMALL CAP IDEA: SubsequentEnergy Solar Fund provides excessive yield at a reduction

NextEnergy Solar Fund’s half year numbers underline a familiar puzzle for renewable infrastructure investors: A portfolio that appears to be doing what it said it would do is trading at a steep discount.

At the recent interims for the six months to 30 September, net asset value (NAV) per share fell 6.6 per cent to 88.8p, giving a fund NAV of £510.9 million. The share price, however, sits far lower.

 Broker Cavendish in a recent note said that ‘at the current 54p share price, the discount to NAV is 39 per cent’ and calls this ‘inconsistent with the resilient operational performance of the portfolio’.

For income hungry private investors, a double-digit discount combined with a double digit yield is at least worth a closer look.

What does the fund actually own?

NextEnergy Solar Fund (NESF) is a London listed investment company that owns solar farms and one battery energy storage system, known as a BESS. At the half year it held 100 operating solar assets and one BESS asset, with total installed capacity of 939 megawatts and a remaining weighted average asset life of 24.3 years.

The portfolio is mainly UK focused, but there are assets in Italy, Spain and Portugal. Total generation in the period was 7.6 per cent ahead of budget, helped by solar irradiation 13 per cent above expectations. This outperformance produced an extra £2.5 million of cash.

So, the physical assets are doing more than expected. The pressure on NAV has come from somewhere else.

Why has NAV fallen?

NAV is the per share value of the underlying assets, after debt, based on discounted cash flow models. For NESF, those models are highly sensitive to assumptions about future electricity prices.

Cavendish attributes the bulk of the NAV decline to ‘a decrease in short term UK power price forecasts’, which feeds directly into expected revenues. Third party consultants supply those price curves. The fund uses the average of their central forecasts.

In this period, one consultant produced a particularly low near-term forecast, which dragged the average down and knocked £25.1 million, or 4.4p per share, off the NAV. A further 0.9p per share reduction came from lower revenue forecasts for the battery asset.

Offsetting these headwinds were positive items. The passage of time in the valuation model, often called ‘time value’, added 4.5p per share. Project out performance contributed 0.7p. A renegotiation of fees with asset manager WiseEnergy delivered a 1.3p uplift.

In other words, what has changed is the modelled value of future cash flows rather than the assets’ ability to generate electricity today.

Revenue visibility and how the fund gets paid

About half of NESF’s revenue comes from inflation linked, government backed subsidy schemes. The other half is earned through power purchase agreements, or PPAs, with utilities and corporate offtakers.

Subsidies include Renewable Obligation Certificates and Feed in Tariffs, which pay the generator an indexed top up for the electricity produced.

PPAs are contracts that fix the price at which NESF sells power, usually for one to three years. The company runs a ‘rolling 36 month’ PPA programme that aims to lock in prices above adviser forecasts to increase cash flow visibility.

For income investors this contractual structure matters because it underpins the dividend.

Dividend cover looks robust

NESF has been a consistent dividend payer since listing in 2014. The fund is estimated to have declared cumulative dividends of £419 million, equivalent to 80.5p per share.

In the first half of the current financial year the fund declared dividends of 4.21p per share, the same as the prior year period. Dividend cash cover, which is the amount of operating cash flow relative to cash dividends, was 1.7 times, up from 1.5 times a year earlier.

The board has ‘approved a sustained dividend target’ of 8.43p for the current year, and Cavendish says this is ‘forecast to be covered in a range of 1.1 to 1.3 times by earnings post debt amortisation, and providing a prospective 15.6 per cent yield, one of the highest in the UK market’.

That prospective yield figure is based on the current share price cited in the note. It is unusually high for an infrastructure fund whose revenues are heavily contracted and partially subsidy backed. Investors will want to weigh that income attraction against balance sheet and policy risks.

Gearing and the capital recycling programme

NESF is not a low geared vehicle. Including £198.5 million of preference shares, total debt at the half year was £517.5 million. With gross asset value ‘just over £1.0bn’, analysts calculate period end gearing to gross asset value at 49 per cent.

Most of the debt, 69 per cent excluding look through borrowings in underlying vehicles, is at fixed rates, including the 4.75 per cent preference share dividend. The remainder sits in a revolving credit facility priced at 120 basis points over Sonia after a refinancing earlier this year.

Because the fund is close to its 50 per cent policy limit for gearing, it has paused a £20 million share buyback scheme after purchasing 15.6 million shares into treasury. Instead, the focus has shifted to asset sales through a capital recycling programme, known as the CRP.

The first three phases of the CRP, covering 145 megawatts of capacity, have already raised £72.5 million and are estimated to have added 2.76p per share to NAV. Disposals so far have typically been at notable premiums to carrying value. For example, the Hatherden project was sold at ‘a 100 per cent premium to the holding value (2.0 times invested capital)’ with an internal rate of return of 57 per cent.

A final phase involving 100 megawatts of operational assets is under way, and the board is considering ‘a potential further expansion of the CRP as part of the strategic options review’.

Strategic review aimed squarely at the discount

The board has launched a strategic review ‘to explore all potential options to address the substantial share price discount to NAV’. Cavendish says this may ‘include unlocking further capital beyond the final phase of the capital recycling programme’, with conclusions expected in 2026.

Governance is also evolving. Tony Quinlan, former chief financial officer of Drax Group, became chair on 3 December 2025. Investors often pay attention to such changes when a board is weighing more radical options.

The review does not guarantee any outcome, but its explicit focus on narrowing the discount is notable.

Policy risk: the RO and FiT indexation consultation

One reason why the market may be cautious is policy risk. The Department for Energy Security and Net Zero is consulting on changes to how Renewable Obligation Certificates and Feed in Tariffs are indexed to inflation.

There two options under consultation. The first is an immediate switch to using CPI rather than the current RPI on ROC buy out and FiT prices. The second would freeze ROC and FiT prices from April 2026 and then apply a shadow CPI series until the revised path catches up with current prices, after which CPI indexation would resume.

DESNZ estimates that the potential saving to an average UK household would be about £3.50 a year under option one and about £12.58 under option two.

NESF has estimated that option one could reduce its NAV by about 2p per share, while option two could cut NAV by about 9p per share. On the latest 88.8p NAV, that worst case impact would be around one tenth of NAV. The company has responded to the consultation and has said that ‘implementing either proposal would prove detrimental for all stakeholders, including investors, energy consumers, HM Treasury and the UK economy more widely’.

It is not yet known whether either option will be adopted. This uncertainty hangs over the whole UK renewables sector and is an obvious risk factor for NESF.

Putting it together

NESF offers a 39.2 per cent discount to NAV, a reaffirmed dividend target of 8.43p per share for the current financial year, forecast dividend cover of 1.1 to 1.3 times, first half cash cover of 1.7 times, portfolio generation 7.6 per cent ahead of budget, and gearing close to 50 per cent of gross asset value.

Against this stand the sector wide consultation on subsidy indexation, the sensitivity of NAV to power price assumptions, and the constraints imposed by relatively high leverage. Future disposals under the capital recycling programme and the outcome of the strategic review will be important markers.

For private investors comfortable with renewable infrastructure and its policy risks, the combination of high cash yield and a large discount to asset value may make NESF worth closer examination. This article is not a recommendation to buy or sell. Investors should carry out their own due diligence, including reading the company’s reports and considering their own appetite for risk, tax position and investment objectives, before making any decision.