Panmure Liberum has raised its price target on NextEnergy Solar Fund Ltd (LSE:NESF, FRA:5NE) to 59.9p from 58.7p and kept its 'buy' rating after the solar investor formally put itself up for sale on Wednesday.
Analyst Shonil Chande said the board's decision to invite proposals for the whole company was the correct course, having argued for several months that a reinvestment strategy was fundamentally unviable given the fund's capital structure.
However, he cautioned that unless the buyer proves to be manager NextEnergy Capital itself, any offer is likely to be closer to 60p than the valuation implied by Drax's recent acquisition of Bluefield Solar Income Fund.
The broker said key differences include NextEnergy not being a pure UK portfolio and having a much smaller, less advanced and less accessible development pipeline.
The fund's £200 million of preference shares add further complication, as a change of control could lead holder USS to seek repayment.
The shares, issued in 2018 and 2019 with a fixed 4.75% dividend, are central to why Panmure Liberum believes a sale process is the best option.
The broker said the fixed £200 million claim represents an increasing proportion of value as net asset value erodes with subsidy roll-off.
Chande moved to a fully sale-based valuation, weighting equally between a manager-led acquisition and a third-party deal.
Under a manager-led sale, the broker estimates net proceeds of 65p per share, a 14% discount to net asset value, reflecting the greater strategic value and synergies available to NextEnergy Capital.
A third-party sale would yield around 55p, a 28% discount, as the broker does not see the same built-in optionality for an outside buyer.
The fund said there are currently no discussions with any bidder.
The announcement comes only months after a March strategic reset targeting annual returns of 9% to 11%, a framework the broker said the market never believed was deliverable on an acceptable risk-adjusted basis.
Still, Chande said delivering an exit option in the range of 60p to 65p is preferable to the alternatives.
