Thursday, 26 September 2019

NextEnergy Solar - Portfolio Addition


Having dipped a toe in the water of solar infrastructure with my purchase of Bluefield Solar and Foresight Solar earlier this year, I decided to complete the set and add NextEnergy Solar Trust (NESF.L) to my green portfolio (thanks to a nudge from Richard).

This is the largest of the three with assets of £730m and the company has recently been elevated to the FTSE 250. Launched in 2014, the trust operates a portfolio of solar 'farms' located mainly across the South of England however in 2017, they acquired the Solis portfolio in Italy which accounts for around 25% of total operations.

According to the latest annual report to end March 2019, the company performed well over the previous year with energy generated being 9% above budget mainly due to more sun than average. Total return for the year including dividends of 6.65p was 11.8% (FTSE All Share 8.8%). Over the 5 years since launch, the average annualised return is 9.5% p.a.

Around 2/3rds of the existing portfolio benefits from the usual government ROC subsidies. The rest of the portfolio revenues are derived from purchase power agreements with utility companies. These government subsidies are no longer available for new installations however the company has decided to move ahead with a new subsidy-free 5.5MW solar unit at Hall Farm in Leicestershire which is due to be completed shortly. They will then start work on a second 50MW project in Bedfordshire which will be the largest in the whole portfolio. Like Bluefield, they are working on a strategy to extend the life of existing assets and negotiate lease extensions and planning approvals which should help to increase net assets.

It will be interesting to see if this subsidy-free strategy can generate comparable returns but it is quite likely due to the falling costs and increased efficiency of the PV technology. One area which could benefit these companies is storage - battery or otherwise - because it will be a big advantage to store energy when abundant and sell it when there is higher demand. I am guessing these companies will already be looking into this area.

Dividends

The company pays quarterly dividends and the target for the current year is 6.87p - an increase of 3.3% on last year. I have purchased the shares at 120p in my Halifax ISA so the fwd yield is 5.7%. As can be seen from the chart, the share price has been fairly stable over recent years and I will be happy with any modest increase in addition to the dividends.

The shares currently trade at a 10% premium to underlying NAV of 110p which seems to be broadly in line with the others in this sector.

Ongoing charges are 1.1% which seems on a par with my other solar funds. There are a number of large institutional shareholders including Prudential, Artemis, Investec, Baillie Gifford and Legal & General
 
3 Yr Comparison v Bluefield Solar
(click image to enlarge)

In just a few short years, investment in renewables has moved from niche/risky to mainstream/solid as we transition quickly from fossil fuels to clean energy. Solar and wind can now compete on cost alone with natural gas and nuclear and this makes it easier for policy makers and government to promote renewable energy as a larger part of the mix.

A recent analysis from Carbon Brief suggested almost 50% of our electricity will come from renewables by 2025. This includes wind, biomass and hydro/wave as well as solar but it means that capacity for solar should expand from currently 5% to approx. 10% over the coming few years. Hopefully the likes of NextEnergy will secure a share of this growth.

The UK is to host the IPCC COP 26 gathering in Glasgow next year and I expect to see further government policies to increase renewables which will demonstrate leadership on climate and back up the recent decision to move to net zero emissions by 2050.


Of course as with most investments, the sector is not without risks. I suspect the main one would be a decline in the prices NESF could secure for supply of electricity and the need to revise its long term assumptions which would have a negative effect on NAV. There are also political considerations both here and in Italy so these aspects have to be weighed in the balance.

This addition takes my 'green' allocation to over 50% and I am pleased to say that following the recent disposals of Vanguard Lifestrategy and HSBC Global Strategy funds, my portfolio is now fossil-free and climate-friendly (more on this in a future post).

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!

5 comments:

  1. Each to their own but with >50% invested in one industry sector, this is not, IMO, considered investment advice for the readers of this blog. It is a vanity project. It may work, it may not, the same as for any portfolio with a heavy bias to one sector/geography. This step change does not reflect considered investing across a range of asset classes, it's simply a punt on one sector. This is now not for me. I will now opt out of receiving email notification of further articles. As I said, each to their own.

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    1. Hey Pinner,

      As I try to constantly remind readers, THIS BLOG IS NOT INVESTMENT ADVICE!! It is a record of my personal journey and as I end each post "should not be regarded as an endorsement or recommendation". If people want to follow the journey, that's fine and it's also fine if they decide not to. So if the blog is no longer for you...no problem.

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  2. Nice to see you invested. All looks very steady so far. It will be interesting to see if they can really exploit subsidy free solar and storage profitably. In the meantime the income is a great compensation for the wait.

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    1. Thanks Richard. Early days but no surprises, share price at 123p and first dividend of 1.717p due end of next month.

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  3. I like solar power but I think the technology is not quite there yet in terms of efficency,especially in our part of the world. Have you ever looked at companies in parts of the world where the get more daylight? Also have you ever looked at companies who used wave power as a green alternative

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