This renewables fund is a bargain for dividends

Now is a great time to buy this renewables fund. It is selling at absurdly low prices and paying a trailing 12 month dividend yield of 7.26%

| More on:
happy solar panel installers, solar energy

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

New Energy Solar Ltd (ASX: NEW) posted its half year results after the close of trading on Friday. The renewables fund provides solar powered electricity production via two solar plants in Australia and 14 in the United States. The company derives its income from power purchase agreements (PPA). These are long-term contracts to provide solar energy with prices fixed at the time of signing.

New Energy Solar has had a mixed year so far, due largely to the impact from coronavirus. Nonetheless, it has already paid out an interim dividend of 3 cents per share in August. Based on the New Energy Solar share price at the time of writing, this represents an unfranked interim dividend yield of 3.6%. Moreover, the company has a trailing, 12-month dividend yield of 7.26%.

The principal issue for this fund over the first half of 2020 has been lower energy prices. This is more collateral damage from the oil price feud between Saudi Arabia and Russia. As a result, this is likely to be a long-term trend within the sector. Fortunately for the fund, 96% of its current output is under existing PPAs, which have an average remaining term of 15.4 years. However, the price drop impacts the company in various ways.

Financial forecasts

PPAs largely insulate the renewables fund from a drop in prices for the periods that the agreements are in place. However, for the period beyond the life of these agreements, there is little pricing stability. Consequently, independent valuers take into account forecast prices over the assets' useful life, including the uncontracted period. 

As a result, New Energy has recorded a decrease on net asset value per security of 12.6%. Moreover, coronavirus has also led to a tightening of capital markets based on the uncertainty of the pandemic.

Operating results

During the 6-month period ended 30 June 2020, New Energy Solar's portfolio generated over 748.1 GWh of electricity. This production is equivalent to an annual CO2 displacement of 1,000,000 tonnes of emissions. Accordingly, powering 126,000 US and Australian equivalent homes, or removing 102,000 cars from the road.

However, actual plant output was less than guidance for the first half. This was due mainly to higher than anticipated rainfall in North Carolina and parts of New South Wales. In addition, the fund faced commissioning issues at two of its new power plants. One of which has resulted in a warranty claim. Lastly, on 17 June 2020, several plants at California sustained damage following a grass fire. This has reduced their availability to approximately 68% of name plate capacity until mid 2021.

Earnings of the renewables fund

The fund recorded total underlying revenues of US$33.8 million, with earnings before interest, tax, depreciation and amortisation (EBITDA) of US$23.8 million. Because of the capital structure of the renewables fund, $16.4 million is attributable to New Energy Solar. This is clearly a very profitable enterprise. Even more so because of the long-term pricing protection of the PPAs. 

Nevertheless, as an investment trust, it has to account for any change in valuation in its profit and loss statement. Hence, the company registered a statutory net loss of $52.7 million. The devaluation of the company's assets also had an impact on gearing, which now sits at 62.1%. New Energy Solar aims to have this at 50% over the long term. The company's weighted average debt maturity is 7.4 years, and refinancing this debt is not possible due to coronavirus uncertainty.

Foolish takeaway

The fund's business model insulates it from low energy prices on current assets for at least the next 15 years. On that issue alone, I believe the ongoing dividend payments are likely to be secure. However, as a weather dependent asset, there are always unknowns that can impact the company.

The clear challenges here are reducing the gearing of the fund, and looking for growth options that will preserve operating margins. Lastly, the market treats New Energy Solar as a dividend share. Therefore, the price builds up closer to the ex-dividend date, and then falls sharply. 

Buying this week will preserve high dividend yields into the future. The company currently has a share price that is 36.3% lower than its net tangible asset value per share.

Motley Fool contributor Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

A male electricity worker in hard hat and high visibility vest stands underneath large electricity generation towers as he holds a laptop computer and gazes up at the high voltage wires overhead.
Share Market News

ASX 200 utilities shares outperform: Are investors switching to defensives?

The utilities sector was the best performing sector by a wide margin last week.

Read more »

A couple cheers as they sit on their lounge looking at their laptop and reading about the rising Redbubble share price
Broker Notes

Top brokers name 3 ASX shares to buy next week

Brokers gave buy ratings to these ASX shares last week. Why are they bullish?

Read more »

two men smiling with a laptop in front of them, symbolising a rising share price.
Broker Notes

These ASX 200 shares could rise 25% to 60%

Analysts think these shares are top buys and could rise materially.

Read more »

A man looking at his laptop and thinking.
Share Gainers

Here are the top 10 ASX 200 shares today

Investors finished the trading week on a sour note today.

Read more »

Happy teen friends jumping in front of a wall.
Share Gainers

4 ASX 200 stocks smashing the benchmark this week

Investors are sending these four ASX 200 stocks soaring this week. But why?

Read more »

A happy young couple lie on a wooden deck using a skateboard for a pillow.
Broker Notes

Bell Potter says this growing ASX 200 stock can rise over 40%

Big returns could be on the cards for buyers of this stock.

Read more »

Broker written in white with a man drawing a yellow underline.
Broker Notes

Brokers name 3 ASX shares to buy today

Here's why brokers are feeling bullish about these three shares this week.

Read more »

A couple makes silly chip moustache faces and take a selfie on their phone.
Share Market News

Which delivered superior returns in FY25: CSL, A2 Milk, or Telstra shares?

We review the share price growth and dividend income delivered to investors in FY25.

Read more »