Results analysis: Octopus Renewables Infrastructure

• Octopus Renewables Infrastructure  (ORIT) produced a NAV total return of 2% for the six months to 30/06/2024. The trust's NAV fell marginally from 106.0p to 105.2p (-0.7%). The main negative movements related to the costs of paying dividends and financing costs, and these were largely offset by operational performance, valuation adjustments related to power prices, the sale at a premium of a Swedish wind asset, and the positive impact of a new PPA on the Crossdykes asset. Since IPO in December 2019 ORIT has generated a NAV total return of 31.2%.
• Shareholder total return was -16.9%, with ORIT's share price tracking a wider move down  across the renewable energy infrastructure peer group in the first quarter of 2024. Since IPO, shareholder total return is -11.3%.
• The interim dividend of 3.01p is in line with the dividend target for the whole financial year to 31/12/2024 of 6.02p. The interim dividend was covered 1.33x (30/06/2023: 1.09x) If achieved, the target for the whole year would be a 4% increase, in-line with 2023 CPI inflation.
• Post-period end, in August 2024, ORIT announced completion of the sale of Ljungbyholm onshore wind farm in Sweden, for €73.7m (FX-adjusted price being £0.8m higher than the 30/06/204 valuation). The sale delivered an IRR of 11.3% over the lifetime of the investment. Together with two previous transactions in December 2023, this brings the total realised from ORIT's capital recycling programme to £161m. The recycling programme provides transactional evidence of ORIT's valuation policy, with all three transactions executed at a premium to the holding value at the time of completion. Proceeds will largely be used to pay down short-term borrowings through the revolving credit facility (RCF).
• ORIT made one new investment during the period, a £5.9m follow-on into the floating offshore wind and sustainable fuels developer Simply Blue. A new PPA was signed on the Crossdykes asset with Sky UK for 10-years with inflation-linkage, resulting in an uplift to the valuation of £5.5m, and the previously announced acquisition of 199MW of solar assets in Ireland, the largest solar complex in Ireland, was completed.
• ORIT initiated a share buyback programme in June 2024 allocating an initial tranche of up to £10m. At 30/06/2024, c. £0.9m had been spent on buybacks adding 0.07p to NAV. Post-period, a further c. £1.4m has been spent on buybacks.
• Gearing over the period rose from 39% LTV to 46% at the period end but following the sale of Ljungbyholm and partial repayment of the RCF, this falls to 43%. The overall average cost of debt is 4.4% and the average maturity is 9.6 years. It is expected that the RCF, which has a current interest cost of c. 7.0%, will be reduced from £134m in September 2024, adjusting for the partial repayment noted above, to £50m by the end of 2025, which would materially reduce the average interest cost. ORIT has expressed a desire to reduce overall gearing level to below 40%, which it considers to be a reasonable long-term level.
• ORIT's operational portfolio generated 605GWh (30/06/2023: 628GWh) of electricity, 17% below budget, mainly due to unfavourable wind speeds and grid curtailments which impacted performance across the onshore wind assets.
• ORIT'S portfolio at 30/06/2024 consisted of 41 assets across six European countries, including the UK (40%), Ireland (17%) together with France, Finland, Germany and Sweden. 27 of these are solar plants with generating capacity (on a pro-rata ownership basis) of 509MW, 7 onshore wind assets generating 251MW and one offshore wind asset generating 42MW, together with battery storage (under construction) and developers. After adjusting for the post-period end sale noted above, 86% of assets have fixed revenues for the next two years, and 50% have 10-year inflation linkage.
• Phil Austin, chair, said “The requirements for impactful investment into the energy transition remain in place, with a supportive political and regulatory environment also firmly present. The Board therefore sees an encouraging future outlook for both the Company and the renewable energy sector as a whole, with continued focus on delivering sustainable value to our investors."

Kepler View

Taking Octopus Renewables Infrastructure’s (ORIT) current discount to NAV of c. 24% and deducting ongoing charges, we estimate the share price is saying that the valuation discount rate is c. 10%, rather than the 7.0% it currently is. That valuation discount rate is validated by over £160m of disposals since December 2024 at figures above carrying value. This is, of course, an indicative number, but serves to highlight the very wide gap between the market's expectations and the possible outcome.

Readers probably already understand the imperfect nature of plotting the discounts of a group of trusts that only report their NAV four times a year against a daily share price, so we advise that the chart below should be treated as an indicator of the direction of travel rather than a precise record of every stop on the journey. It shows the progression of ORIT and its peer group across the period of rising interest rates, where discounts first settled in, through to 2024, when discounts took another leg down, seemingly as a result of sentiment rather than any further specific macro changes. Yet this coincides with the beginning of ORIT's capital recycling programme, which provides the transactional evidence to support the valuation, and of course it also covers the period when the first rate cut in Europe came, which is very relevant to ORIT with its pan-European portfolio. ORIT also recently announced the first tranche of up to £10m of buybacks which will give some NAV and EPS enhancement. Clearly ORIT has to balance the opportunity to buy shares back with the desire to repay its RCF. Repaying the RCF should also be earnings-enhancing since the interest cost is c. 7.0%.

While the capital recycling programme, together with the objective to pay down debt and carry out share buybacks are all potentially NAV and earnings accretive, it's good to see that the more 'future facing' aspect of ORIT's business, building out further assets, continues with a relatively small injection of further capital into one of its development platforms, Simply Blue, which focuses on renewable fuels and floating offshore wind. The trust also completed the construction of the 67MW Breach solar farm in the UK, now 13% of ORIT's overall solar capacity. An extension site to ORIT's Irish solar asset also completed construction in the first half, and once acquired will make the asset the largest solar plant in Ireland, meeting about 2.5% of the national solar target for 2030.  The Board notes however, that as current projects have successfully completed, the balance is shifting further towards operational assets and it's likely that further construction projects will be the focus for new investment. As we've noted before, this focus requires less capital than acquiring operational assets and therefore seems very much in step with the times, where raising large tranches of new equity will be very challenging. Overall then, while sentiment among investors remains weak largely on macro concerns that are starting to recede, the operational direction of the portfolio is positive and the capital recycling programme is providing the evidence that the discount to NAV is real, and thus returns from a narrowing discount could be very attractive. In the meantime, ORIT's yield is c. 7.6% and the discount c. 24%  

Press continue to read the full article...