What's occurring for NESF?

Will NESF be tidy or will it go to 0000h?

Dear reader

NESF might not be everyone's cup of tea but at the end of the day when all's said and done, is it tidy?

It’s another FTSE250 company. The OB has covered far too many of these large caps recently; he’s in danger of needing a revised disclaimer and garnering a new reputation if this non-nano cap nonense carries on.

But I promised articles around renewables over several articles, so I picked out what I saw as my faves. This is my final fave.

My favouriting is that I picked out all the high yielders and those with the juiciest discounts and what I see as deep value. Those with a “meh” discount and/or “meh” yield I’ve overlooked and perhaps will come back to…. perhaps you, reader, can point out any that are obvious value and overlooked. I did look over several and I wanted to like JLEN with its fragrant bio-methane holdings. Besides just think of the dad joke OB titles I could use. For example: I’m just JLEN from the block, used to NAV a little - now I NAV a lot…..

But I didn’t think JLEN was very good value, so that article is on hold.

Next Energy Solar

NESF is a large solar investment trust. After years of trading at a premium to NAV, both its NAV and share price have fallen away, albeit its NAV has reverted to 2021 levels - do we see a clue there that “noise” both increased then decreased the assets. Let’s investigate that.

NESF has a large UK footprint, with 10% Italy, and 5% RoW. Its assets are long life, and 933MW capacity and 599GWh generated in 2023 tells us that the energy yield was 7.3% of capacity, while in 2022 the energy yield was 9.1% (599000/(933*365*24)).

The 2022 yield is spot on to the average based on our world in data (you can click on the chart below). It reveals that capacity and generation are fairly consistent between countries. I had wrongly assumed that yield for the UK was lower than say Italy or the Sahara Desert, but the data doesn’t show that. So 85% of solar being in the UK isn’t the disadvantage I’d first imagined it would be. At least not using today’s technology.

The UK yield vs every other country in the world - as you generate more power (horizontal line) you generate more power (vertical line) - there’s not much variance between the equator and the north pole

The answer to this apparent riddle/contradiction is a lower temperature offsets lower irradiance. While more irradiance means more power, more heat shortens the life of equipment and reduces the efficiency of solar too. That factoid has gobsmacked me.

NESF appears to have an impressive portfolio of assets, with low costs of debt (2/3 fixed and 1/3 floating but on very advantageous rates and with 10+ years repayment structures), while revenue has a degree of protection from price fluctuations through hedging, ROC (renewable obligation certificates) and subsidy. As at 31/3/23 NESF had agreed fixed UK pricing (hedged) covering 88% of budgeted generation for the 2023/24 financial year, 44% of budgeted generation for the 2024/25 financial year and 13% for the 2025/26 financial year.

Income in the September 2023 interim covers dividends 1.8X.

The forward yield is a very impressive 11.8%. (based on a 8.43p per share dividend)

Eagle-eyed readers will spot energy storage assets in the above map, and this is a growth area for NESF. These enable NESF to capitalise on existing infrastructure including existing grid connections and inverters, meaning OPEX is optimised, but also that solar generation can be sold at optimal times (i.e. early evening). The idea being that the 92 UK sites could be retrofitted over time with energy storage. Currently 1 site is nearly live, 1 has planning, and 4 applications are in progress.

Interestingly, the power price forecasts include a “solar capture” discount, which reflects the discount on pricing in daylight hours versus during baseload hours. With the introduction of storage such a discount disappears - so a positive reversion for the NAV that not only do you add the asset to the NAV but you also remove the solar capture discount too.

Forecast Prices & Discount Rates

NESF reveals substantial drops due to discount rates increasing to 8% and short term power prices falling also.

When you strip out that “noise” and focus on the real movements roughly inflation protections offsets power price forecast changes, income nearly covers dividends (and in the 25% higher irradiance in 2022 would have fully covered the dividend), while asset capital gains offset project losses and other losses.

The net NAV fall is the 5p/share discount rate change.

Looking forward it appears that Power Price forecasts will eventually return to a positive, as will the discount rate. It wasn’t clear to me that the forecasts are considering the subsidies, the ROCs and hedges that NESF employ. Much of current year is hedged and one and two years ahead also.

4Q24 (1st Jan 2024 to 31st March 2024) meanwhile, shows a further power price forecast decline only slightly offset by positive pricing inflation changes. Going forwards income should rise due to rising capacity which in the 4Q24 update a week or so ago surpassed 1GW.

So future NAV should revert and there’s even scope for some NAV growth, although the large dividend swallows up most of the income so this is predominantly an income stock.

Conclusion

The dividend looks far safer than one might suppose looking at the discount to NAV and recent share price falls. This share actually looks fairly boring and safe, underneath its racy yield and apparent losses through temporary factors which wax and wane. It was a fairly complicated share to understand and compared to SEIT and HEIT the reporting felt inferior. I found much less hidden value compared to the others, also.

Just the obvious value.

That long term the idea that power prices are going to be anything other than upwards based on growing demand and challenges with supply is ignoring the laws of physics. So falling forecasts will revert eventually.

That short term, those power price forecasts might even revert later this year. Today it was announced that El Nino has ended and La Nina has begun. This suggests a colder winter for Europe in 2024. That combined with complacency and our new government knifing Oil & Gas in a populist tax grab, isn’t going to help keep the lights on.

The one area of hidden value is its strategy of adding storage to existing grid connections which is a genius move. Without a connection there is a 5 year average wait for such connections - where those with existing connections have, err, the power. Boom boom.

Regards,

The Oak Bloke.

Disclaimers:

This is not advice

In general, Micro cap and Nano cap holdings in other articles than this one, might have a higher risk and higher volatility than companies that are traditionally defined as "blue chip".

The NAV fluctuations