Octopus Renewables Infrastructure (ORIT ) trust is to continue selling assets as it looks to overturn its double-digit discount, with future proceeds going towards a possible share buyback programme as well as repaying debt and funding further investments.

Portfolio managers David Bird and Chris Gaydon plan to offload ‘serious’ assets – such as the two operational Polish wind farms that fetched £92m in December, a 21% premium over their net asset value (NAV) – to release as much capital as possible.

They told Citywire that the board had not bought back any shares yet because it was reluctant to increase borrowing to fund them, but buybacks would be at the ‘forefront of their minds’ when proceeds from future asset sales come through.

Bird and Gaydon said share buybacks were a ‘sound’ capital allocation in certain circumstances, but were unlikely to move discounts, which they believed were more sector-driven. This means falling government bond yields, if and when interest rates are cut, will likely be the biggest driver of a rerating, while reform over investment companies’ cost disclosure ‘could only be a good thing’.

‘We’re not talking about just more little things like the [£4.7m] Spanish solar sale, we’re talking about serious asset sales,’ they explained. ‘We can’t give any specifics on timing, but we’re seeing demand for these assets in the market and there are offers coming in, suggesting our NAVs may be conservative, but the processes are taking a little bit longer.’

Renewables’ annus horribilis

The annual results published yesterday showed a difficult year to 31 January for the 8%-yielding portfolio of wind, battery, solar and hydrogen assets in the UK, Finland, France and Ireland.

Net asset value (NAV) slipped 3.1% to 106.04p per share, driven by falling power price and inflation forecasts and an increase in valuation discount rates to 7.2%.

Total pre-tax earnings came in 24% below budget as onshore wind assets saw reduced wind speeds and power prices declined.

With 81% of revenues fixed over the next two years, the portfolio has some insulation from falling power prices, allowing the board to lift this year’s dividend target by 4% to 6.02p per share, which it expects to be fully covered.

The fall in dividend cover from 1.77 times in 2022 to 1.18 times in 2023 reflected the fall in power prices, with Stifel’s Will Crighton noting he did not expect cover to be much improved in the upcoming year.

In February, debt levels crept up to 46% of gross assets – following the acquisition of four Irish solar farms near Dublin – which is at the higher end of the peer group. The revolving credit facility is £195m drawn at an average cost of 7.2%, and with interest charges totalling £12.3m,  it made sense to reduce that first, said Crighton.

A possible merger with Aquila European Renewables (AERI ), which would swell assets to £1bn, remains on the cards, with its board reviewing the combination and other options.

‘We still think that combination would make an awful lot of sense for both sets of investors,’ Bird and Gaydon stated. ‘Our mandates and collective portfolios are the most naturally aligned.’

Over the year, ORIT made its first investments into the battery storage sector, whose volatile revenues have alarmed investors in recent months. The pair said it was a useful small portion of the portfolio, allowing them to capture event-driven spikes in energy prices such as the recent temporary closure of French nuclear power stations for maintenance.

Liberum’s Alex O’Hanlon said the results were very much in line with the sector, which endured a perfect storm of rising discount rates, falling inflation and low power prices combined with low wind speeds, making for an ‘annus horribilis’.

On the bright side, O’Hanlon pointed to falling discount rates in 2024 if interest rates were cut that would lift the portfolio, while pointing out ORIT’s ‘exceptional’ earnings visibility. He gave a ‘buy’ recommendation with a target price of 115p. The shares stand at 72p at a 32% discount to NAV.