Results analysis: Octopus Renewables Infrastructure

• Over the six months to 30 June 2023, total shareholder return (TSR) and NAV total return were -4.9% and 0.9% respectively. Since IPO in December 2019, the TSR is 6.1% and NAV TR 27.0%.
• The board increased the target dividend to 5.79p for FY 2023, representing an increase of 10.5% over FY 2022, which is in line with CPI inflation. Targeted dividends are expected to be fully covered by the operating portfolio's cashflows.
• ORIT completed two new transactions in the period, acquiring a 50% stake in a ready-to-build battery storage site in January, and in April agreed a £5m investment into a joint venture which will develop green hydrogen electrolysis projects with a target of developing c. 700MW of capacity by 2030.
• Construction was completed at the Cumberhead Onshore Wind Farm in Scotland, with the site fully operational from 31 March 2023. The Breach Solar Farm is expected to complete by the end of September, with energisation expected in Q4 2023, and ORIT has entered into an inflation linked power purchase agreement (IPPA) with Iceland Foods for the energy generated at this site.
• 76% of forecast operational revenue is fixed (30 June 2022: 58%) for the next two years, and c. 55% of the revenues forecast to 30 June 2033 are now explicitly inflation linked (with reference to UK RPI, French inflation and Polish CPI) (30 June 2022: 51%). ·
• As at 30 June 2023, the portfolio comprised 38 assets across seven countries (UK, France, Ireland, Finland, Poland, Sweden and Germany) and three technologies, as well as developer investments. Total capacity is 668 MW (30 June 2022: 583 MW).
• Once fully invested, the portfolio has the potential to power the equivalent of 536,000 homes with clean energy, an estimated 598,000 tonnes of carbon emissions avoided, up from 521,000 homes and 482,000 tonnes of carbon in 2022, respectively.
• At the end of the period, the shares traded on a 14.1% discount to NAV which has widened slightly to 14.5% as of the time of writing.
• Chair Philip Austin MBE said “Despite the challenging current environment, the tailwinds for the sector remain very strong: there are requirements for net zero, widespread public support for renewables, and enhanced desires for better energy security. To capitalise on these tailwinds, and to re-balance the portfolio towards assets that offer greater opportunities for capital growth, the investment manager has been reviewing the portfolio to identify candidates for asset sales. The company is considering the sale of a small number of assets and is seeing strong buyer appetite which could result in cash proceeds being realised and available for reinvestment in the coming months. Looking further ahead, we expect to be able to raise additional funds through capital markets once conditions improve, and we remain confident that there will be a healthy pipeline of projects to pursue alongside the proprietary pipeline arising from the company's development stage investments.”

Kepler view

Whereas this week’s pivot on net zero policies by the UK government doesn’t have any direct consequences for Octopus Renewables Infrastructure (ORIT), it serves to highlight one of ORIT’s strengths, that its diversification extends not only across different renewables technologies, but across different jurisdictions. In fact, ORIT’s management team lists positive developments in a number of jurisdictions they have invested into, including the UK, where there appears to be progress on the logjam in National Grid’s approvals process for new grid connections, that serve to highlight that while headline grabbing news can imply otherwise, renewable energy’s development is inexorable. In our view ORIT, with its diversified strategy not only across technologies and geographies, but also development stages, is well-placed to benefit from this, even as the discount means that for almost all investment trusts there is a hiatus for raising new capital. ORIT’s ability to recycle capital into projects at development and construction stages means that a relatively small amount of capital can, over the long-term, make a big difference to its portfolio. This means the team won’t simply have to wait things out until a new cycle of capital raising begins, but can continue to develop the portfolio, as the results covering just a short six month period summarised above illustrate.

ORIT’s widening discount this year is, in our view, explained by factors outside the control of ORIT management. Essentially, higher interest rates have led to a de-rating of ORIT and related investment trusts, as the relative value of bonds has risen and attracted capital away from this part of the market. ORIT saw a small decline in the valuation of its portfolio, and again this is largely due to rising interest rates putting pressure on discount rates, with a number of factors such as inflation-linked contracts and construction profits, offsetting some of this.

ORIT isn’t, of course, exclusively an investor in UK assets, but it’s an interesting coincidence that ORIT’s results were published the same day that the Bank of England didn’t raise UK interest rates, after 14 consecutive rate hikes. This was on the back of an unexpected drop in inflation. This doesn’t necessarily mean we can conclude that rising rates are over, but it’s a positive sign, and if this trend establishes itself, we think it could be a positive catalyst for ORIT’s discount to narrow towards NAV.

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