Come rain or shine, I’ll always be eager to hear about undervalued FTSE 250 shares with tantalising dividend yields.
NextEnergy Solar Fund (LSE:NESF) is just such a stock. It has an 8% yield while trading at a sizeable discount to its net asset value.
The company also has a compelling story. It boasts a portfolio that includes 99 operating solar assets. Not content with that, it plans to muscle into the fast-growing energy storage market.
Sunny skies ahead
With the global push towards renewable energy, solar power and energy storage have emerged as significant growth areas.
NextEnergy is well positioned to tap into this potential, with almost 100 operating solar assets, international investments, and joint ventures in the UK standalone energy storage market.
According to industry projections, global installed solar capacity will skyrocket from 832GW in 2019 to 7,749GW by 2050.
Saving for a rainy day
The consultancy firm LongSpur Research put it best when they talked about the vital role of energy storage in a decarbonised economy.
In a recent report, the authors compared designing a renewable energy system without storage to designing a car without brakes.
At some point, the wind will stop blowing and the sun will stop shining.
With the UK having the potential to add around 30GW of storage capacity, NextEnergy’s focus on energy storage puts them in a prime position to benefit from this expanding market.
NextEnergy has expanded its mandate to allow investment in standalone energy storage. It has increased its capacity from 10% to 25% of its gross value added.
This strategic move positions NextEnergy to capture the opportunities presented by the rising demand for energy storage, according to analysis by LongSpur.
Sheltered from inflation
Inflation can erode the value of an investment over time, but NextEnergy offers a natural hedge against this risk.
That’s because the company benefits from a high proportion of regulated revenues that are linked to the Retail Price Index (RPI).
Clear skies on the financial front
NextEnergy’s recent earnings update demonstrates its robust financial performance. In the six months ending 30 September 2022, the company’s attributable profit surged, primarily driven by higher investment income and an increase in the fair value of its investments.
The rise in profit, from £50.2m to £81.9m, is an encouraging sign.
Moreover, the three analysts covering NextEnergy forecast a share price increase of 33% over the next year.
And with a net asset value per share of 114p, the company is trading at close to an 18% discount currently. Its dividend cover ratio is a respectable 1.3.
It’s always cloudy somewhere
One potential concern is the sensitivity of renewable energy companies to changes in government policy and subsidies.
After all, policy shifts can impact the profitability of renewable energy projects and introduce uncertainties that could affect NextEnergy’s future returns.
On reflection, I don’t know enough about solar subsidy schemes to feel confident owning shares in NextEnergy right now.
Despite the growth story and the solid financials, I’ll pass until I understand better the political risks.
