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NextEnergy Solar Fund – New focus on total returns

Following its strategic review, NextEnergy Solar Fund’s (NESF’s) board plans to refocus on delivering both income and capital growth, aiming for long-term total returns of 9%-11%. This year’s dividend target of 8.43p will be met, but future dividends will be set at 75% of operating free cashflows after debt and expenses. For the year ending 31 March 2027 (FY27), the estimated dividend range is 4.0p-4.6p.

Lowering the dividend should release around £40m over five years, which will be used to strengthen the balance sheet, with a loan-to-value (LTV) target of 40%-45%, and fund new investments to grow NAV. Plans include upgrading existing solar assets and adding energy storage, with a goal for storage to make up 30% of the portfolio.

NESF has finished its capital recycling programme with the sale of The Grange and South Lowfield solar farms for £46.2m, and will use the proceeds to pay down its revolving credit facility. Further asset sales totalling 120MW, plus the sale of NESF’s private solar fund investment and two co-investments from 2027 onwards, will release more capital.

As we explain in this note, NESF has found itself in a difficult place. No bidders emerged during the strategic review and a wide discount to NAV lowers its enterprise value, which limits its ability to buy back shares under the USS preference share covenant. While asset sales have helped reduce debt, weak demand for mature assets means this is not a quick solution and a managed wind down is not possible. As NESF needs cash, reducing the dividend is seen as the best option. The board and advisers believe this approach, which conserves cash, can deliver the targeted 9%-11% total returns.