Growth capital trust Chrysalis (CHRY ) has a long way to climb if it wants to return to its highs of 2021, but analysts at Liberum anticipate a turnaround will begin sooner rather than later as the trust has entered its New Year stock picks alongside Octopus Renewable Infrastructure (ORIT ).

Each quarter, Liberum’s sector teams list their most preferred stocks on a six- to 12-month time view and the latest iteration saw the addition of the two investment companies.

Chrysalis

Chrysalis, a client of Liberum, has seen its £771m portfolio severely devalued by the stock market over the past 18 months, with its share price plummeting from 267p in August 2021 to 68p on Friday, a 51% discount to the end of September net asset value (NAV) of 135p.

However, Liberum analyst Shonil Chande, who has a target price of 118p for the stock, thinks the portfolio is significantly undervalued.

Chande highlighted that Chrysalis has a number of companies that are ‘close to or IPO-ready’ including Klarna and Starling Bank and the current share price does not ‘capture the potential uplifts to NAV from liquidity events’.

He added that the team at Chrysalis, who announced they are leaving fund manager Jupiter to set up their own firm to focus solely on the trust, have valued their holdings ‘conservatively’. Chande pointed to Klarna, which the trust values at $6.75bn (£5.3bn). Recently, another investor in the buy-now-pay-later lender, Creades, valued the holding at $7.85bn.

Chande’s forecasts do not assume a portfolio realisation event, but he said the improving environment for exits would buoy the listed fund and if one is achieved and the discount persists then the board would be able to return capital ‘at a very high ROI [return on investment]’.

He added that ‘Chrysalis teased the market at the end of the year saying it had visibility over a likely disposal’, which could add 5.5p per share to net asset value.

The closed-end fund has been discussing a capital allocation strategy, the final version of which will be published in its annual results next month.

Under previously announced proposals, the company will first have a ‘prudent cash reserve’ which it suggests should be about £50m. It will then prioritise returning capital to shareholders, targeting buying back £100m of shares and then will balance retaining capital for future investments and returning 25% of profit from realisations or disposals to shareholders.

Octopus Renewables

Octopus Renewables Infrastructure, a £605m portfolio of solar and wind assets in Europe and the UK, also made it onto Liberum’s list of 13 stocks.

Analyst Alex O’Hanlon said ORIT was at an ‘exciting juncture’ thanks to a capital recycling programme and a proposed merger with peer Aquila European Renewables (AERI ).

On the last working day before Christmas, ORIT issued a stock exchange announcement stating that after several approaches to the AERI board about a potential merger had met with no response, it had taken the deal to some shareholders and received their support.

O’Hanlon said a ‘key drawback’ for the trust has been its scale and this would be addressed by the merger as its NAV would hit £1bn.  

ORIT also believes the deal will aid its capital recycling programme, a plan to sell assets to repay short-term debt facilities. In October last year, the trust made headway as it sold two Polish wind farms at a 14% premium to their latest valuation.

The analyst said ORIT ‘provides strong inflation linkage, minimal currency risk and a dividend that is well covered’ but is differentiated from peers Renewables Infrastructure Group (TRIG ) and Greencoat UK Wind (UKW ) through ‘higher construction exposure (targets circa 30%) creating NAV uplift through yield compression once operational’.

Shares in ORIT, which have suffered a more than 10% fall in the past 12 months, are trading at a 17% discount to NAV. The trust traded at 89p on Friday. Liberum has a target price of 115p.