Wind is turning in green trust’s favour

MIDAS has long been a fan of the Octopus Renewables Investment Trust (ORIT), despite a drop in the share price that would cause a less patient investor to lose their appetite for seafood.

The trust is run out of the City by Octopus Group, the same cephalopod that brings many of us our gas and electricity. Managers Chris Gaydon and David Bird hope that, by stretching its tentacles into a range of renewable energy sectors and geographies, they can satisfy investors who clamour for sustainability and shareholder returns all at once.

The company’s strategy has much to recommend it. By investing in technologies in different areas and ensuring that some are operational while others are being constructed, there is a fair amount of visibility on the returns the company will get.

However, the company’s revenue is buffeted by forces outside its control, from wind speed to inflation rates. These external factors have served to deepen the discount between the firms’ Net Asset Value (NAV) – the supposed value of the assets that it owns – and its share price. The company last week released a new NAV of just under £1.04 per share. Although the price, now at 74p, has falled by 21p since Midas last recommended it in November, it is still worth holding on to.

The new NAV is a 2 per cent drop from its previous valuation thanks to a number of factors, including a drop in short-term power prices and a slight appreciation of the pound against the euro pushing down the valuation of some assets. Inflation forecasts also influenced the company’s valuation, as many of its contracts are inflation-linked and the company will receive less if inflation is lower.

Fans of the stock point to a guaranteed rate of return from many of its assets, with 84 per cent of revenues fixed or contracted until March 2026, as well as a toothsome dividend, raised to a target of 6.02p for the full year. There was also good news on the firm’s Scottish windfarm site in Lanarkshire which has signed a 10-year deal with Sky to purchase its power since the NAV was calculated.

Weighing against this are Octopus’ relatively high debt pile, which is expensive to service, as well as the expectation that power prices will fall and interest rates remain higher for longer.

For ORIT investors nursing losses, the main questions are whether the discrepancy between the company’s valuation and its share price will resolve itself in their favour, and if so, when?

There isn’t a simple answer, but as interest rates fall, the dividend paid by ORIT, which yields over eight per cent based on its 2024 expected full-year payout, will become more attractive compared with savings rates, and the cost of debt servicing will fall, too.

Traded on: Main market Contact: octopusrenewablesinfrastructure.com, orit@octopusenergygeneration.com Ticker: ORIT