MIDAS SHARE TIPS UPDATE: Octopus is a buy for the brave

What do we all need, but don’t appreciate? Right now it’s investments in renewable energy, where companies have been bashed over concerns about electricity price caps in Europe, as well as the impact of higher interest rates and ongoing global uncertainty.

As a result, many investment trusts that allow investors to gain exposure to wind, wave or solar energy are trading below their net asset value – the value of the assets they hold.

In theory, this means those who buy them get a bargain – but is this really the case? It’s important to dig into the details to make sure.

One candidate worth looking into is Octopus Renewables Infrastructure Trust, which is owned and operated by the same cephalopods that give some of us our utility bills. The trust was launched on the stock exchange in December 2019 with much fanfare. Since then, the share price has teased rather than swum, and this week the shares are only slightly above its launch price, at £1.01. They are also nearly 7 percent below the trust’s reported NAV assessment of £1.11 per share.

Brokers think the real discount is even greater, as Octopus will benefit from the government’s rollback of the corporate tax hike. This was taken into account in the last calculations. According to the stockbroker Berenberg, this is good for an extra 1.4 pence per share on the net asset value, making the shares seem like a better bet. However, a discount to net asset value doesn’t tell the whole story, so we need to go into more detail before deciding to invest.

On the positive side, Octopus’s investments have a long-term theme. We all know there needs to be more investment in renewable energy, and the company has a broad portfolio that includes everything from wind farms in Sweden to batteries storing energy in Bedfordshire.

In terms of rising costs, more than half of the company’s projected operating revenues over the next decade will be inflation-linked, while its diversification in terms of geography, currency and type of renewable technology contributes to stability.

However, the energy market is currently an unstable place and prone to government interference.

Europe is planning price caps for renewable energy as other costs skyrocket, and it is difficult for companies like Octopus to predict returns. Interim revenue, reported this week, was 6 percent below budget, as the budget was set when power prices were even higher.

Octopus is also in an acquisition phase and has called on its loan facilities this year to make acquisitions. Higher loans can be a risk if interest rates rise.

Then there is Ukraine. Octopus’ interim results warned that it had assets in countries bordering Ukraine and Russia, and its intrinsic value could be hit by an escalation in the war.

Midas verdict: Renewable energy is currently a tough place to be. Companies need to make predictions as policies around them change, and investors like Octopus face difficulties in many jurisdictions. On the other hand, the current discount to net asset value, which stockbroker Peel Hunt estimates at 8 percent after the corporate tax change, makes Octopus attractive. If you believe in long-term renewables and have time to wait, the 5.1 percent dividend yield makes the jump more appealing. At the current level, confidence is a bargain for the brave.

Trade on: Main market ticker: ORIT Contact: octopusrenewablesinfrastructure.com or orit@octopusrenewables.com