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Drax is still waiting for the regulatory smoke to clear

Uncertainty remains over government support for the generator's plans to convert its remaining coal plants to biomass
July 26, 2016

It's been a case of out of the frying pan and into the fire for Drax (DRX) over the past few years. With the writing on the wall for coal-fired generation, the company took a brave leap into biomass - a technology that chief executive Dorothy Thompson describes as "working very very well." But twists and turns in the government's renewables policy begs the question where Drax goes from here.

IC TIP: Sell at 350p

The company's reported earnings jumped in the first half, boosted by a £163m unrealised gain on currency hedging contracts. But on an underlying basis, earnings per share slumped by almost 60 per cent to 4.2p as Drax was hit by weak commodity prices and the government's decision last year to scrap its exemption from the Climate Change Levy. The dividend took a step down too, in line with company policy to pay out half of its underlying earnings.

On the plus side, Drax says there have been signs of recovery in forward power prices in recent weeks as expectations heighten of tight winter supply. But Drax says its "cautious optimism" here is somewhat offset by continued regulatory uncertainty, with questions over the shape of any future government support and the need to secure EU state aid approval for a coal-to-biomass conversion contract.

Broker Whitman Howard is forecasting adjusted EPS of 5.7p for the year to December 2016, down from 11.3p in FY2015.

DRAX (DRX)
ORD PRICE:350pMARKET VALUE:£1.42bn
TOUCH:349p-350p12-MONTH HIGH:364pLOW: 205p
DIVIDEND YIELD:0.8%PE RATIO:9
NET ASSET VALUE: 473pNET DEBT:4%

Half-year to 30 JuneTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20151.51539.65.1
20161.4918436.62.1
% change-2+248+281-59

Ex-div: 22 Sep

Payment: 7 Oct