Energy volatility remains a substantial concern, but this trust offers a way to profit

Telegraph

08-05-2025

Questor is The Telegraph's stock-picking column, helping you decode the markets and offering insights on where to invest.
Energy costs have been at the forefront of investors' minds since the invasion of Ukraine by Russia in early 2022 led to extreme volatility in power prices. However, while it spurred a cost of living crisis, there have also been ways to benefit from higher energy prices and inflationary forces.
Octopus Renewables Infrastructure Trust (ORIT) invests in renewable generation assets, such as solar and wind, which are characterised by long-term revenues generated from the sale of electricity, while often also benefiting from government subsidies under schemes designed to support the transition to a lower-carbon power network.
Fluctuations in power prices and renewable resources can result in revenue variation outside of the company and manager's control but this can be mitigated through power price hedging arrangements, and partially offset by those same subsidy revenues, which are typically not linked to the price of power.
ORIT launched in late 2019 and has since developed its portfolio to one split roughly equally between wind and solar, with additional investments in renewable energy project developers and a small stake in a battery storage project. While small, the investments in project developers offers ORIT preferential access to significant project pipelines.
The trust is derisked through its diversification, with a good spread across Europe but retains a home bias, with the UK representing 42pc of its invested capital. Combined with the variety of technologies the managers invest in, shareholders receive greater certainty of returns and reduced revenue volatility.
Investment manager Octopus Energy Generation is one of the largest renewable energy investors in Europe, with £6.8bn of assets under management at the end of last year. This is spread across more than 4.5GW of capacity across 18 countries, meaning ORIT benefits from a scale of resource significantly larger than its market capitalisation would otherwise imply.
Exposure to construction assets has been a key component of ORIT's strategy since launch, and a source of differentiation versus peers, generating £16m of equity growth for shareholders through value appreciation as assets are de-risked from construction to operational status.
The company follows a progressive dividend policy, and since launch ORIT has successfully grown target dividends in line with inflation, while keeping these affordable. Dividends for FY24, for example, were 1.24x covered after the scheduled debt principal repayments that took place during the year. The board again expects dividends for FY25 to be fully covered, supported by the level of fixed revenue over the coming years, with 84pc of the portfolio's forecast revenue over the 24 months to end-March 2027 fixed or contracted.
Additionally, the portfolio benefits from inflation linkage, helping to drive dividend growth over time, with almost half of the portfolio's forecast revenues over the 10 years to end-March 2035 benefiting. ORIT's manager has also proven its expertise in structuring accretive long-term power purchase agreements (PPAs) with high-quality counterparties.
The trust has recently upgraded its share buyback programme, tripling its scheme from £10m to £30m to be returned to investors, as a result of its recent £161m of asset disposals.
This disposal activity did not stop the company successfully growing both revenues and Ebitda in the year to end-December 2024, to £132m and £86m, respectively – despite below average solar and wind resource generated during the year.
ORIT has recently highlighted at least a further £80m of disposals during the remainder of 2025, which paves the way for further potentially significant catalysts during 2025 and builds upon what has already been a successfully executed capital recycling programme.
The trust is scheduled to hold its first continuation vote at its AGM next month, following the fifth anniversary of the company's IPO, and the board has been assessing the existing portfolio and investment strategy in order to target further growth opportunities while maintaining a fully covered progressive dividend. Additionally, the board is reviewing the company's fee arrangements.
Despite the progress the company has made under its capital recycling programme and the underlying portfolio's fundamental performance, ORIT's share price today trades at a 33pc discount. This is wider than comparable peers, where similar listed infrastructure investment companies focused on renewable generation assets trade around a peer group weighted average discount of 30pc.
ORIT offers investors an attractive and highly competitive dividend yield of 9pc and meets our key criteria for a core pick within infrastructure investment companies: a low-risk portfolio with an attractive total return profile alongside fully covered and growing dividends.
This column sees ORIT's discount as excessively wide on an absolute basis and relative to peers, failing to recognise the portfolio's fundamental performance, the progress the company has made and the further actions the company has flagged for later this year.