Midas has long been a fan of the Octopus Renewables Investment Trust (ORIT), despite a share price decline that would cause a less patient investor to lose their appetite for seafood.
The trust is run out of town 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 into a range of renewable energy sectors and regions, they can satisfy investors clamoring 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 under construction, there is a fair amount of visibility into the returns the company will achieve.
However, the company’s earnings are buffeted by forces beyond the company’s control, from wind speed to inflation rates. These external factors have widened the gap between the company’s Net Asset Value (NAV) – the perceived value of the assets it owns – and its share price. The company last week published a new NAV of just under £1.04 per share. Although the price, now at 74 cents, has fallen 21 cents since Midas last recommended it in November, it’s still worth holding.
The new NAV is a decline of 2 percent from the previous valuation due to a number of factors, including a short-term decline in energy prices and a slight appreciation of the pound against the euro, which is pushing down the valuation of some assets went. Inflation forecasts also affected the company’s valuation, as many of its contracts are linked to inflation and the company will receive less when inflation is lower.
Share price drop: But Midas has long been a fan of the Octopus Renewables Investment Trust
Fans of the stock point to a guaranteed return on many of its assets, with 84 percent of income fixed or committed until March 2026, as well as an excellent dividend, increased to a target of 6.02p for the full year. There was also good news about the company’s Scottish wind farm in Lanarkshire, which has signed a 10-year power purchase agreement with Sky since the NAV was calculated.
On the other hand, Octopus’s relatively high debt mountain, which is expensive to repay, and the expectation that energy prices will fall and interest rates will remain higher for longer.
For ORIT investors facing losses, the key questions are whether the discrepancy between the company’s valuation and its stock price will resolve itself 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 the expected full-year payout in 2024, will become more attractive compared to savings rates, and the cost of debt will increase to rise. The service will also decrease.
Midas judgment: Renewable energy may not be as fashionable an investment as it was a few years ago, but the need for wind farms and solar energy remains, while global volatility could cause energy prices to rise again. At this level, the shares are well worth holding, with the dividend ensuring you get paid to wait for better times.
Traded on: Main market Contact: octopusrenewablesinfrastructure.com, orit@octopusenergygeneration.com ticker: ORIT