NextEnergy Solar (NESF) kept its dividend on target in the final quarter of 2025, but a sharp drop in the portfolio’s value has puts its strategic options in the spotlight.

The £1bn portfolio of solar energy infrastructure and energy storage projects reported a disappointing drop in its net asset value (NAV) over the period, falling 4.4% to 84.9p per share, and a 2% decline when the dividend is factored in.

A 17% drop in its share price, however, has left them languishing on a 42% discount.

Although the board reaffirmed its full-year dividend target for full-year 2025/26 of 8.43p per share − which is equivalent to a yield of 17% − the fall in NAV and the tumble in the share price mean investors will be focused on an update on the strategic review which is due on 11 March.

NESF chair Tony Quinlan said the strategic review was ‘progressing well’ and the board remains focused on delivering ‘long-term value for shareholders’.

Panmure Liberum analyst Shonil Chande said the priority for NESF ‘should be to find a buyer for the portfolio/company this year’.

‘We have little confidence in any reinvestment mandate and the preference shares restrict NESF’s appeal as a merger candidate,’ he said.

If the trust cannot find a buyer, he warned that the lack of demand for UK solar renewable obligations contract (ROC) projects – which have recently had their government subsidies cut – will ‘restrict the capacity for meaningful asset sales’.

Consequently, the trust will find it ‘harder to get ahead of the gearing treadmill, compounded by structural net portfolio value erosion as the portfolio ages’.

‘This is more significant for the UK ROC solar portfolios, given the higher proportion of value tied to subsidies,’ said Chande.

The government switched the indexation of the subsidy from the retail price index (RPI) to the consumer price index (CPI) meaning the level of subsidy increases at a slower rate and upending the income stream relied upon by many renewable trusts.

Taking into account the indexation switch, NESF said the impact on NAV is 2% and Quinlan described it as a ‘headwind’ but with ‘clarity now emerging, we are confident that NESF is well positioned to navigate the transition’.

Ross Grier, chief investment officer at NextEnergy Capital, said the portfolio ‘continues to perform in line with expectations and demonstrate resilient’.

‘Although the sector faces near-term pressure from power price adjustments and shifting inflation expectations, long-term fundamentals remain robust, supported by growing demand for secure clean energy and the critical role solar plays in the UK’s energy transition,’ he said.

Technical trouble

NESF is sitting under the weight of preference shares, a type of share that givens holders priority over ordinary shareholders in terms of dividend payments and distributions in the event of liquidation although do not carry voting rights.

The trust issued £200m of non-voting preference shares in two £100m tranches to an investment vehicles owned by Universities Superannuation Scheme (USS), providing it with cash to pay down debt and invest in pipeline opportunities.

Chande said the preference shares are ‘non-redeemable before 2030’ and deferring a strategic outcome ‘amplifies their impact’.

Without sufficient reinvestment, Chande said the NAV would decline 5-6% a year out to 2030, and increasing to 10% a year into the mid-2030 when the end of government subsidies approaches.

‘This accelerates the proportional influence of the £200m preference claim and narrow confidence in equity value later in the decade,’ he said.

The only credible way to preserve equity value at NESF is to sell the company, with Chande flagging manager NextEnergy Capital as the ‘most plausible’ buyer.

A third party buyer would be more likely to buy at a lower price given UK solar projects sit ‘at the older end of the age curve and carry some of the highest annual net portfolio value erosion rates’.

‘Because they have historically paid out the highest proportion of NAV as dividends, they have had very limited internal capacity to offset that erosion,’ he said. 

‘It is very difficult to sell UK ROC solar projects, which form the bulk of NESF’s portfolio. Private capital is far more interested in construction and development.’

While the USS preference shares cause an issue for NESF, the pension fund could also provide a way out. 

USS was linked to a bid for Bluefield Solar Income (BSIF) and its manager earlier this month, which Chande said ‘could open up some options for the preference shares and NESF’s future more broadly’.