What do we all need but don’t appreciate? It is currently investing in renewable energy, where companies have come under fire over concerns about capping electricity prices in Europe, as well as the impact of higher interest rates and ongoing global uncertainty.
As a result, many investment funds that allow investors to access wind, wave or solar energy trade below their net asset value — the value of the assets they own.
In theory, this means that those who buy them are benefiting – but is it really so? It is important to delve into the details to be sure.
Future: If you believe in renewables for the long term and have time to wait, a 5.1% dividend yield will make this a more attractive move.
One noteworthy candidate is the Octopus Renewables Infrastructure Trust, owned and operated by the same cephalopod that brings some of us our energy bills.
The trust was launched on the stock exchange in December 2019 with some fanfare. Since then, the share price has fluctuated rather than floated, and this week the shares are only marginally above their launch price of £1.01. They are also nearly 7% below the trust’s reported net asset value of £1.11 per share.
Brokers believe the real discount is even bigger as Octopus would benefit from the government’s repeal of the corporate tax increase. This has been taken into account in the latest calculations.
According to stockbroker Berenberg, this gives an additional 1.4 pence per share to the net asset value, which makes the shares a better bet. However, the discount to net asset value does not tell the whole story, so we need to go into more detail before making an investment decision.
On a positive note, Octopus’ investments are long-term oriented. We all know that more investment in renewable energy is needed and the company has a wide portfolio spanning everything from wind farms in Sweden to energy storage batteries in Bedfordshire.
In terms of cost growth, more than half of the company’s projected operating income over the next decade will be driven by inflation, and its diversification in terms of geography, currency, and type of renewable technology improves its stability.
However, the energy market is now unstable and subject to government intervention.
Europe is planning marginal renewable energy prices as other costs rise and it’s hard for firms like Octopus to predict profits. The interim income reported this week was 6% below budget as the budget was set when electricity prices were even higher.
Octopus is also in the acquisition phase and has used its leverage to make acquisitions this year. Higher borrowing can be a risk as interest rates rise.
Then Ukraine. Octopus’s interim results showed that it has assets in countries bordering Ukraine and Russia, and net asset value could suffer if the war escalates.
Midas’ verdict: Renewable energy is a difficult place right now. Companies must make predictions as the politics around them change, and investors like Octopus must address issues in many jurisdictions.
On the other hand, the current discount to net asset value, which stockbroker Peel Hunt estimates at 8% after the income tax change, makes Octopus attractive. If you believe in renewables for the long term and have the time to wait, a 5.1% dividend yield will make this a more attractive move. At current levels, trust is a buy for the brave.
Bidding for: Main market Ticker: He says Contact: octopusrenewablesinfrastructure.com or [email protected]
Credit: www.thisismoney.co.uk /