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 managed from 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 extending their tentacles to a variety of renewable energy sectors and geographies, they can satisfy investors clamoring for sustainability and shareholder returns all at the same time.
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 built, there is quite a bit of visibility into the returns the company will achieve.
However, the company’s revenue is affected by forces outside its control, from wind speeds to inflation rates. These external factors have served to deepen the discount between the net asset value (NAV) of companies – the supposed value of the assets it owns – and the price of its shares. Last week the company posted a new NAV of just under £1.04 per share. Although the price, now 74p, has fallen 21p since Midas last recommended it in November, it’s still worth holding on to.
The new NAV represents a 2 percent drop from its previous valuation thanks to a number of factors, including a drop in near-term energy prices and a slight appreciation of the pound against the euro putting downward pressure on the valuation of some assets. Inflation forecasts also influenced the company’s valuation, since many of its contracts are linked to inflation and the company will receive less if inflation is lower.
Share price drop: But Midas is a long-time fan of the Octopus Renewables Investment Trust
Share fans are targeting a guaranteed rate of return on many of its assets, with 84 per cent of income fixed or contracted until March 2026, as well as a sizeable dividend, raised to a target of 6.02p for all year. There was also good news about the company’s Scottish wind farm in Lanarkshire, which has signed a 10-year deal with Sky to purchase its power since the NAV was calculated.
Working against this is Octopus’ relatively high debt pile, which is expensive to service, as well as the expectation that energy prices will fall and interest rates will stay high for longer.
For ORIT investors suffering losses, the main question is whether the discrepancy between the company’s valuation and its share price will be resolved in their favor and, if so, when?
There is no simple answer, but as interest rates fall, the dividend paid by ORIT, which yields more than eight percent based on its expected full-year 2024 payout, will become more attractive compared to interest rates. savings and the cost of debt. service will also decrease.
Midas Verdict: Renewable energy may not be as hot an investment as it was a few years ago, but the need for wind farms and solar power persists, while global volatility may cause energy prices to skyrocket again. At this level, the stock is worth holding on to, and the dividend ensures that you get paid to wait for better times.
Traded in: Main market Contact: octopusrenewablesinfrastructure.com, orit@octopusenergygeneración.com Heart: ORIT