Earlier this year the fund raised the dividend target level by 2.6% for 2021 to 7.05p, represents a yield of more than 6.5% at the last close price of 108p.
Although NESF shares have made some recovery from the market’s initial coronavirus slump to trade at around a 7% premium to its net asset value, this compares to a premium of 9.2% for Foresight Solar Fund and 17.7% for Bluefield Solar Income Fund.
“The disparity between the premium of NESF and its two mature peers is hard to justify, and seems to us to be an anomaly,” said analyst Thomas McMahon at the company’s ‘house’ broker.
“NESF’s assumptions regarding its NAV are not aggressive, and are actually more conservative than those of at least one of its more highly rated peers.
“If anything, this means the NAV is understated relative to peers, and the disparity between NESF and Bluefield Solar Income Fund in particular is therefore even larger.”
Generating stable NAV returns since being floated six years ago in the face of falling power prices is in itself an achievement, the analyst said, viewing the fund’s revisions to its discount rate used to value its assets and their expected lives have been “relatively restrained”.
A key feature to this has been manager NextEnergy Capital’s “expert knowledge of the market” through its experience as a developer and asset manager, which has led to lower operating costs and a strong track record of ‘alpha’.
In other words, the manager has consistently delivered excess power, and hence revenues, relative to that expected from an asset when acquired.
“We think this is especially attractive when combined with the expertise and market knowledge the manager has via its development and asset management activities, which give it visibility on new developments, new technological innovations and pricing.”
McMahon added: “NESF’s share price has not yet recovered from its post-COVID slump, and we think there is a case for considering a switch from peers to NESF on valuation grounds.”
McMahon noted that, since the fund was floated six years ago, the dividend has been increased in line with the retail price index, but as power prices have become less correlated to RPI, this linkage is under review.