The tangible benefits of asset diversification: Octopus Renewables Infrastructure

ORIT shows the tangible benefits of asset diversification…by Alan Ray

Overview

Octopus Renewables Infrastructure (ORIT) owns a c. £1bn portfolio of renewable energy generation assets. A key strength is its diversification, with operating assets located in several different countries and spread across different technologies, principally solar, onshore and offshore wind. In the Portfolio section, we look at the tangible benefits of diversification. ORIT also has equity stakes in developers, giving it access to projects at an early stage, with the potential to generate higher returns. 2024’s sale of a fully operational Swedish wind asset for an 11% IRR provides a case study for the ORIT team’s ability to move a project from pre-construction to operation and then sale, generating returns above the trust’s long-term targets.

ORIT currently yields c. 8% and since 2021 has established a track record of increasing its fully covered dividend in step with UK CPI inflation. The dividend target set by the board for the financial year ending 2025, if achieved, would mean the fourth consecutive year of dividend increases in line with inflation. ORIT has a relatively high proportion, 84%, of its energy prices fixed over two years and almost 50% of its assets have inflation linkages over ten years.

ORIT’s high dividend yield is in part a function of its c. 27% discount and in response to this the board has adopted a capital allocation policy that is focussed on reducing debt, buying back shares, and selling some strategically selected assets while maintaining the ability to make selective new investments. We look at this policy in more detail in the Discount section.

ORIT’s manager, Octopus Energy Generation (OEGEN) is one of Europe’s largest investors in renewable energy and the team managing ORIT directly, led by David Bird and Chris Gaydon, has access to over 150 professionals with experience across all aspects of investment and management, covering multiple geographic markets and technologies.

Kepler View

 
ORIT has no direct exposure to the US, where a significant policy shift away from renewables is underway, and is invested across a range of countries that maintain a very constructive approach to renewables. Indirectly, the team reports that equipment supply chains are not affected by tariffs, as generally, the US does not export equipment involved in renewables. Conversely, supply chain pressures could ease if the US imports less. Consequently, the team see the US’s position as, at worst, neutral for ORIT.

In the Dividend section, we show how ORIT’s average asset life has increased from 28 to almost 30 years over the last four years through active management, which is crucial for maintaining and increasing dividend cover over the long term. This gives us further reassurance that the progressive dividend policy can be maintained in the future.

The US is, however, weighing heavily on wider investor sentiment, not least because it clouds the picture for interest rates and inflation, and the knock-on effect for ORIT and its peer group is a continuation of the wide discount. In response, ORIT’s capital allocation policy includes an expanded £30m share buyback programme and a reduction in total debt, funded by asset disposals at or above NAV. These have demonstrated the team’s ability to move a project from pre-construction, through to operation, to generate returns above the trust’s targets. If the very wide discount continues to narrow, investors could achieve returns considerably higher than this.

Bull

• Diversification provides quantifiable benefits to power output
• An 8% yield backed by a covered dividend growing in line with inflation
• Robust capital allocation policy enacted to address the discount

Bear