NextEnergy Solar Fund Ltd's (LSE:NESF) hefty dividend yield might be catching the eye, but Cavendish reckons the market's overlooking what it calls a "too great" discount to the underlying value.
In a new note, issued after the release of the NESF's prelims, the broker argues that the 26% discount to net asset value doesn't reflect the real-world prices the company is achieving in its capital recycling programme.
Three phases of this plan have already netted £72.5 million, all at healthy premiums to book value, and a fourth phase is in progress.
The shares currently trade at around 70p, well below the NAV of 95.1p.
Cavendish notes that NESF’s solar assets continue to deliver reliable long-term income despite weaker short-term UK power prices, which dented NAV by over 4p. The dividend, meanwhile, remains fully covered and yields 12%.
A share buyback programme has also provided a modest NAV uplift. Cavendish points out the proceeds from recent asset sales further validate the carrying values and backs NESF’s steady dividend guidance.
The fund's conservative debt structure, solid cash flows and long asset life underpin the income stream, the broker says, with further upside if sentiment towards renewables improves. Investors willing to look past short-term noise may find the valuation gap hard to ignore.
In the wake of the results. NESF shares rose 0.53p to 70.72p.