Drax - No Reasons to be Cheerful, yet

Drax: Life must have seemed a lot calmer when oil was $100+ and coal-fired generation was more competitive with other sources. Even better was that you could see lots of subsidies and financial carrots in converting some capacity to nice green biomass generation. Unfortunately the oil price collapse has made gas-generation cheaper and government subsidies, even for green energy, have become harder to nail down. Back in February, at the finals to 31^st December 2014, EBITDA was only down £1m at £229m, but underlying eps dropped from 35.3p to 23.7p, as higher depreciation and finance charges from the biomass conversion investment bit. With group dividend policy being driven off a 50% earnings payout, the decision was to cut the total dividend from 17.6p to 11.9p. (It was 32p in CY2010). The balance sheet showed modest debt of £99m, well covered by that EBITDA of £229m. At that stage the 2015 earnings outlook was weak citing the “major deterioration in commodity markets”. Whilst the Drax Power Station had performed well operationally, they sounded frustrated at the, sedate, progress of EU State Aid clearance relating to the Biomass conversion of the third unit.

Roll forward to today’s trading update and the sky still seems fairly grey. Expectations for the year are unchanged, with challenging trading conditions and weak power prices. Some protection has been achieved through forward contracts, but by their nature that is a rolling programme. They are still selling forward, but the 2016 achieved price of £48.80 is down 2.2% on the 2015 figure of £49.90. The shares are down around a third in the last six months and at 375p, are on 25.9x consensus eps for CY2015 of 14.5p. This points to a dividend of 7.3p for a yield of barely 2%. With the spot crude oil price having recovered from the mid $40’s to low $60’s per barrel, this may well be somewhere near the cyclical low for Drax’s prospects. As for EU and National regulators, guessing or second-guessing their actions is akin to a lottery. So, looking at these CY2015 forecasts may not be much help. If you want to “knife-catch” and feel that things can only get better, then the shares may attract. However, by the yardstick of good initial yield and predictable dividend growth, it is clear that Drax comes up short. (Neil Cumming^, 8^th June 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower