based on the revenue per mw the dividend is firmly covered, apologies for brief message but spent hours pouring over these accounts and individual co accounts, this company is managing things well
Coming to this post rather late, I noticed that 'Note 26' was attached to the Investment Income line including the £6.463M value for the latest half year. Note 26 turns out to be a masterful exercise in obfuscation, that goes some way to explaining the disappointing September 24 Investment Income figure at the same time as ringing alarm bells in relation to the complexity of flows between the parent and subsidiary companies - exactly in line with @OakBloke's wider comments.:
"....At 30 September 2024, £9.6m (30 September 2023: £31.3m; 31 March 2024: £6.9m) was owed from the subsidiaries, being cash trapped within the structure at period end. £5.7m of administrative service fees were received from the subsidiaries during the period (30 September 2023: £5.3m; 31 March 2024 £10.8m), £3.5m of which was outstanding at 30 September 2024 (30 September 2023: £2.0m; 31 March 2024: £1.5m). £6.1m of Eurobond interest was received from the subsidiaries
during the period (30 September 2023: £6.1m; 31 March 2024: £12.3m), £nil of which was outstanding as at 30 September 2024 (30 September 2023: £nil; 31 March 2024: £nil). During the period, dividends of £6.5m (30 September 2023: £40.4m; 31 March 2024: £57.7m) were received from the subsidiaries. Refer to note 11 for terms and conditions on amounts due from subsidiaries. During the period, the Company commenced receiving cash returns in the form of repayment of
intercompany loans in preference to investment income, amounting to £15.2m (30 September 2023: £nil; 31 March 2024: £nil) received from the subsidiaries (included in Investment Proceeds from HoldCos in note 17)...."
At least £15M of investment income seemingly gone awry can be explained by "During the period, the Company commenced receiving cash returns in the form of repayment of intercompany loans in preference to investment income...", but all in all I have to agree that it all seems too opaque, for what one would hope was a stable and straight-forward income stock.
...I probably also am in the "mole-eyed" category, together with Simon, please bare with me....
In the latest full-year annual report the cash-flow statement on p.49 gives a 'pleasing' picture: 102mio received from HoldCos and 43,7Mio invested in Holdco. -> that 'investment' in HoldCo amounts to ~4% of the gross asset value (stated at 1000+mio). And that just very snuggly approximates what may be depreciation given 26year asset life?
shocking reporting here! - very unhappy about the resulting uncertainty....
--just note on "remaining asset life" - thats reported as broadly stable (p.24, annual report 24); at least as number of assets increases slightly (2020-2024)
--maybe for external valuation, we need to go straight at the installed capacity (1015MWp) or the realized generation (852GWh in 2024) and weight that against remaining asset life (26y) and assumed power prices
I'm sorry to inform you that you do not only have eagle-eyed, but also mole-eyed readers. Well, at least one. Because my mind broke at: "However this real profit needs to pay dividends and it doesn’t fully cover that." And how depreciation enters a cash flow equation. What I do understand is this: "Certain metrics like cash flow appear pleasing - that the assets can generate a cash return able to cover the dividend." That the cash generation covered the dividend, and there remained cash post dividend, which, moreover, shows a rising trend.
So if you could break that down to me in simpler terms, why "Real Cash Flow" is a real thing that matters - your mole-eyed reader, though probably very far from turning eagle-eyed, would be very grateful.
[Ok, after re-reading the last part it dawned on me that with... "I conclude to say I would question the sustainability of the dividend. It is “covered” only if you ignore depreciation. In other words NESF is eating its seed corn by paying current dividends." ... you mean that they are under-investing now, and only thanks to that underinvestment they can pay those lavish dividends, but that naturally that underinvestment will come back bite them later when due to years of underinvestment they won't have a sufficient asset base to continue generating said lavish dividends. Is it that what the exercise was about?]
Profits and loss can occur through "fair value" assessment. This is not usually cash.
Profits can occur through cash generation e.g. selling electricity. This is cash obviously!
Depreciation is non-cash and a "fair value" assessment in the sense that the panels were bought years ago but I'm recognising a proportion of their value in 2024 in the P&L. (i.e. that's depreciation). Think of it also like a "kitty" to replace worn out solar panels and invertors.
That's why I conclude they are unfortunately eating their seed corn and stating it's a covered dividend - but only on a cash basis.
The unexplained drop in income was the real killer though - potentially the income growth could cover depreciation and appeared like it was heading that way - but suddenly in the last period it sharply reversed.
Looking at the financial reports, can anyone tell me the difference between '% hedged' and '% hedged by capacity'? The difference is huge for future years and is presumably very important.
I see that GSF had a big fall today in response to a reduction in their NAV, primarily based upon reducing their power price forecasts.
However, I'm looking at another firm in this space with virtually no debt and a fully covered dividend from only 64% of assets that are operational (the rest still in construction). The discount is 43.58%. Yield 8.22%. ENRG is the ticker. It's VH Global Energy Infrastructure. Has quite a lot of foreign exposure which could be positive or negative depending upon where you think exchange rates are going. What do you think? I don't see power price forecasts in ENRG'S last NAV breakdown.
Their power price adjustments would get rolled into their fair value gains/losses. Can't see anything downright negative and clearly it's been caught up in the general sell off. Dividends haven't been fully covered but I see they were 58% operational in 2023 and will be 100% by early 2025.
The range of assets is good.
Only negative could be that it's not self-flagellated itself in the same way others appear to have, so might not have as much upside.
Re: GSF
I've only briefly looked at the results as have been busy but saw some disappointing numbers out of some regions but overall not a terrible result. I think the sector has been selling off today including GSF rather than there being a backlash specific to GSF.
Thanks for your reply. I just got around to responding to this. What did you mean they haven't got around to “self-flagellating” unlike similar ITs? Do you mean most ITs have written down their NAVs this year, but ENRG has not, thereby potentially being on a smaller discount if they rerate their NAV like their peers have done?
Yep so you might see that as a positive or as a negative - I couldn’t see any mitigating factors why and how they’ve avoided the sector wide falls. Might be a Q to pose to their investor relations?
Interesting argument you make and clearly a lot of funds feel the same with the discounting. But 'depreciation' is a notional thing and does not represent a cash out so the negative FCF is actually positive ... but i do take the point that replacement costs are not really covered and the only way would be to hive off funds to hold for that (and no one does that) or depreciate.
But replacement is 15-20 years away ... a bit far to worry about surely.
I have watched this company for a fair while and like you... always just had a niggle somewhere. meanwhile the div keeps rolling up but that will only be until Uk energy costs get in such a muddle a large reset is needed
The unexplained drop in 1H24 income bothered me more than depreciation, and the obfuscated reporting bothered me too. Although given their commentary on improving/replacing Invertors the argument that depreciation is tomorrow's forgotten problem isn't always the case either.
I agree on the impending energy muddle. But better ways to play that via FGEN, SEIT, GSF and HEIT I'd suggest.
Unless the power price forecast experts are right after all and we are heading to future times of inexpensive power somehow.... perhaps by the Power of Grayskull, we'll have the power.
I’ve just been re-reading last June’s interim report from competitor Foresight Solar Fund Limited. They report that the first quarter of the year was exceptionally wet and global output was 7% lower than budgeted. They also have this excellent graphic that shows the impact on NAV for -/+ 10% variation in energy yield fluctuating between - £112m and + £120m. If I’m understanding that correctly then their revenues may have been between £35m - £75m lower depending upon how that continued through 2H.
There may be read across to NESF that explains the drop in income for FY24.
After a record breaking month of March for solar irradiance, it’s worth noting that, all other things being equal, every 1% increase in generation adds ~ 1.2p to NAV
well all expected as far as I could see .. Tin price was low all last year and H1 volume low….
I just look at two large ii’s piling in 2 weeks ago, one practically on the flight back from a site visit.
Really needs a good Lithium deal to really light it up I think… but then the place they look like being in now is where I had them in 9 months time.. so all to play for
In fairness I think the drop in 1H24 is at least partly explained by 'Note 26' attached to that line in their table. See my post here on 31st Jan. All IMHO.
Hi Jim, I had another look at NESF and saw the 3Q update and its operational update says "The full-year dividend target per Ordinary Share is forecast to be covered in a range of 1.1x - 1.3x by earnings post-debt amortisation."
Sounds highly encouraging, right?
Debt amortisation was £0.14m so appears pretty irrelevant.
1.1X-1.3X cover (on £50m of dividiends) implies earnings of £55m-£65m which is between -£8.6m to -£18.6m lower than my estimate of cash earnings.
That's in keeping with FSF and others also reporting a lower return (as Jon says), but once again it appears to be obfuscating rather than updating the market on an adverse result.
Great question and one I hadn't considered. A further example of how you can't really look under the hood of this business at the holdco level. I used the reported holdco EBIT and EBITDA numbers to get the "DA" number.
I guess the answer could be that the depreciation is reducing balance and not straight line?
In digging further I notice that the asset sales at ~14% above NAV are possibly slightly incestuous
In December 2023, the site at Hatherden was sold for total proceeds of £14.3 million. The purchaser, NextPower UK LP, is a 10-year closed-ended private fund managed by NextEnergy Capital. Due to the sale of Hatherden being classified as a smaller related party transaction under the FCA‘s Listing Rules, the Board appointed Deloitte to undertake an independent valuation. The Board also obtained a written confirmation from the Company's Sponsor (“Cavendish”), that the Transaction was fair and reasonable as far as the shareholders are concerned as required under Listing Rule 11.1.10R.
Post period end, the Company sold the site at Staughton for a total consideration of £30.3m. The purchaser for this transaction was also NextPower UK LP. The transaction is not deemed a related party transaction under the FCA’s UK Listing Rules as at the time of the transaction. However, in line with best practice governance, Deloitte were appointed to undertake an independent valuation on NESF’s behalf.
based on the revenue per mw the dividend is firmly covered, apologies for brief message but spent hours pouring over these accounts and individual co accounts, this company is managing things well
Coming to this post rather late, I noticed that 'Note 26' was attached to the Investment Income line including the £6.463M value for the latest half year. Note 26 turns out to be a masterful exercise in obfuscation, that goes some way to explaining the disappointing September 24 Investment Income figure at the same time as ringing alarm bells in relation to the complexity of flows between the parent and subsidiary companies - exactly in line with @OakBloke's wider comments.:
"....At 30 September 2024, £9.6m (30 September 2023: £31.3m; 31 March 2024: £6.9m) was owed from the subsidiaries, being cash trapped within the structure at period end. £5.7m of administrative service fees were received from the subsidiaries during the period (30 September 2023: £5.3m; 31 March 2024 £10.8m), £3.5m of which was outstanding at 30 September 2024 (30 September 2023: £2.0m; 31 March 2024: £1.5m). £6.1m of Eurobond interest was received from the subsidiaries
during the period (30 September 2023: £6.1m; 31 March 2024: £12.3m), £nil of which was outstanding as at 30 September 2024 (30 September 2023: £nil; 31 March 2024: £nil). During the period, dividends of £6.5m (30 September 2023: £40.4m; 31 March 2024: £57.7m) were received from the subsidiaries. Refer to note 11 for terms and conditions on amounts due from subsidiaries. During the period, the Company commenced receiving cash returns in the form of repayment of
intercompany loans in preference to investment income, amounting to £15.2m (30 September 2023: £nil; 31 March 2024: £nil) received from the subsidiaries (included in Investment Proceeds from HoldCos in note 17)...."
At least £15M of investment income seemingly gone awry can be explained by "During the period, the Company commenced receiving cash returns in the form of repayment of intercompany loans in preference to investment income...", but all in all I have to agree that it all seems too opaque, for what one would hope was a stable and straight-forward income stock.
he there,
...I probably also am in the "mole-eyed" category, together with Simon, please bare with me....
In the latest full-year annual report the cash-flow statement on p.49 gives a 'pleasing' picture: 102mio received from HoldCos and 43,7Mio invested in Holdco. -> that 'investment' in HoldCo amounts to ~4% of the gross asset value (stated at 1000+mio). And that just very snuggly approximates what may be depreciation given 26year asset life?
I’ve been trying to understand that investment figure. That could be a great call
shocking reporting here! - very unhappy about the resulting uncertainty....
--just note on "remaining asset life" - thats reported as broadly stable (p.24, annual report 24); at least as number of assets increases slightly (2020-2024)
--maybe for external valuation, we need to go straight at the installed capacity (1015MWp) or the realized generation (852GWh in 2024) and weight that against remaining asset life (26y) and assumed power prices
I'm sorry to inform you that you do not only have eagle-eyed, but also mole-eyed readers. Well, at least one. Because my mind broke at: "However this real profit needs to pay dividends and it doesn’t fully cover that." And how depreciation enters a cash flow equation. What I do understand is this: "Certain metrics like cash flow appear pleasing - that the assets can generate a cash return able to cover the dividend." That the cash generation covered the dividend, and there remained cash post dividend, which, moreover, shows a rising trend.
So if you could break that down to me in simpler terms, why "Real Cash Flow" is a real thing that matters - your mole-eyed reader, though probably very far from turning eagle-eyed, would be very grateful.
[Ok, after re-reading the last part it dawned on me that with... "I conclude to say I would question the sustainability of the dividend. It is “covered” only if you ignore depreciation. In other words NESF is eating its seed corn by paying current dividends." ... you mean that they are under-investing now, and only thanks to that underinvestment they can pay those lavish dividends, but that naturally that underinvestment will come back bite them later when due to years of underinvestment they won't have a sufficient asset base to continue generating said lavish dividends. Is it that what the exercise was about?]
Hi Simon
Profits and loss can occur through "fair value" assessment. This is not usually cash.
Profits can occur through cash generation e.g. selling electricity. This is cash obviously!
Depreciation is non-cash and a "fair value" assessment in the sense that the panels were bought years ago but I'm recognising a proportion of their value in 2024 in the P&L. (i.e. that's depreciation). Think of it also like a "kitty" to replace worn out solar panels and invertors.
That's why I conclude they are unfortunately eating their seed corn and stating it's a covered dividend - but only on a cash basis.
The unexplained drop in income was the real killer though - potentially the income growth could cover depreciation and appeared like it was heading that way - but suddenly in the last period it sharply reversed.
OB
Ok, thanks for replying!
Looking at the financial reports, can anyone tell me the difference between '% hedged' and '% hedged by capacity'? The difference is huge for future years and is presumably very important.
I see that GSF had a big fall today in response to a reduction in their NAV, primarily based upon reducing their power price forecasts.
However, I'm looking at another firm in this space with virtually no debt and a fully covered dividend from only 64% of assets that are operational (the rest still in construction). The discount is 43.58%. Yield 8.22%. ENRG is the ticker. It's VH Global Energy Infrastructure. Has quite a lot of foreign exposure which could be positive or negative depending upon where you think exchange rates are going. What do you think? I don't see power price forecasts in ENRG'S last NAV breakdown.
Re: ENRG
Their power price adjustments would get rolled into their fair value gains/losses. Can't see anything downright negative and clearly it's been caught up in the general sell off. Dividends haven't been fully covered but I see they were 58% operational in 2023 and will be 100% by early 2025.
The range of assets is good.
Only negative could be that it's not self-flagellated itself in the same way others appear to have, so might not have as much upside.
Re: GSF
I've only briefly looked at the results as have been busy but saw some disappointing numbers out of some regions but overall not a terrible result. I think the sector has been selling off today including GSF rather than there being a backlash specific to GSF.
OB
Thanks for your reply. I just got around to responding to this. What did you mean they haven't got around to “self-flagellating” unlike similar ITs? Do you mean most ITs have written down their NAVs this year, but ENRG has not, thereby potentially being on a smaller discount if they rerate their NAV like their peers have done?
Yep so you might see that as a positive or as a negative - I couldn’t see any mitigating factors why and how they’ve avoided the sector wide falls. Might be a Q to pose to their investor relations?
Bit of movement today. Picked some up at 67p. Still love it.
Interesting argument you make and clearly a lot of funds feel the same with the discounting. But 'depreciation' is a notional thing and does not represent a cash out so the negative FCF is actually positive ... but i do take the point that replacement costs are not really covered and the only way would be to hive off funds to hold for that (and no one does that) or depreciate.
But replacement is 15-20 years away ... a bit far to worry about surely.
I have watched this company for a fair while and like you... always just had a niggle somewhere. meanwhile the div keeps rolling up but that will only be until Uk energy costs get in such a muddle a large reset is needed
The unexplained drop in 1H24 income bothered me more than depreciation, and the obfuscated reporting bothered me too. Although given their commentary on improving/replacing Invertors the argument that depreciation is tomorrow's forgotten problem isn't always the case either.
I agree on the impending energy muddle. But better ways to play that via FGEN, SEIT, GSF and HEIT I'd suggest.
Unless the power price forecast experts are right after all and we are heading to future times of inexpensive power somehow.... perhaps by the Power of Grayskull, we'll have the power.
OB
I’ve just been re-reading last June’s interim report from competitor Foresight Solar Fund Limited. They report that the first quarter of the year was exceptionally wet and global output was 7% lower than budgeted. They also have this excellent graphic that shows the impact on NAV for -/+ 10% variation in energy yield fluctuating between - £112m and + £120m. If I’m understanding that correctly then their revenues may have been between £35m - £75m lower depending upon how that continued through 2H.
There may be read across to NESF that explains the drop in income for FY24.
After a record breaking month of March for solar irradiance, it’s worth noting that, all other things being equal, every 1% increase in generation adds ~ 1.2p to NAV
well all expected as far as I could see .. Tin price was low all last year and H1 volume low….
I just look at two large ii’s piling in 2 weeks ago, one practically on the flight back from a site visit.
Really needs a good Lithium deal to really light it up I think… but then the place they look like being in now is where I had them in 9 months time.. so all to play for
In fairness I think the drop in 1H24 is at least partly explained by 'Note 26' attached to that line in their table. See my post here on 31st Jan. All IMHO.
Jim
Hi Jim, I had another look at NESF and saw the 3Q update and its operational update says "The full-year dividend target per Ordinary Share is forecast to be covered in a range of 1.1x - 1.3x by earnings post-debt amortisation."
Sounds highly encouraging, right?
Debt amortisation was £0.14m so appears pretty irrelevant.
1.1X-1.3X cover (on £50m of dividiends) implies earnings of £55m-£65m which is between -£8.6m to -£18.6m lower than my estimate of cash earnings.
That's in keeping with FSF and others also reporting a lower return (as Jon says), but once again it appears to be obfuscating rather than updating the market on an adverse result.
OB
I like TRIG as well
If the assets are valued at £819m and the weighted average life of the assets is 25.6 years, does that make the depreciation £32m?
Hi Jon
Great question and one I hadn't considered. A further example of how you can't really look under the hood of this business at the holdco level. I used the reported holdco EBIT and EBITDA numbers to get the "DA" number.
I guess the answer could be that the depreciation is reducing balance and not straight line?
But we don't really know.
OB
In digging further I notice that the asset sales at ~14% above NAV are possibly slightly incestuous
In December 2023, the site at Hatherden was sold for total proceeds of £14.3 million. The purchaser, NextPower UK LP, is a 10-year closed-ended private fund managed by NextEnergy Capital. Due to the sale of Hatherden being classified as a smaller related party transaction under the FCA‘s Listing Rules, the Board appointed Deloitte to undertake an independent valuation. The Board also obtained a written confirmation from the Company's Sponsor (“Cavendish”), that the Transaction was fair and reasonable as far as the shareholders are concerned as required under Listing Rule 11.1.10R.
Post period end, the Company sold the site at Staughton for a total consideration of £30.3m. The purchaser for this transaction was also NextPower UK LP. The transaction is not deemed a related party transaction under the FCA’s UK Listing Rules as at the time of the transaction. However, in line with best practice governance, Deloitte were appointed to undertake an independent valuation on NESF’s behalf.
Thanks for picking this up OB!