Drax profits, dividends climb during power crisis

Drax (DRX) announced last year it would no longer build any new gas-fired power plants. Now, at the request of the UK government, it is prolonging the life of coal-fired plants, which are far more polluting than gas, in order to help keep the lights on this winter.

This demand shift is captured in the company’s half-year profits: its adjusted Ebitda for the six months to 30 June was up a fifth on a year ago, at £225mn. Additionally, Drax has hiked its half-year dividend 12 per cent and forecast the final payout to be 21p. This came despite biomass power generation falling a fifth compared with last year, because of the "optimisation of biomass generation and logistics to deliver higher levels of generation during the second half of the year". 

The forecast for the rest of the year is strong: The six-month extension to its coal plants’ lives was one reason Drax upgraded full-year cash profit expectations earlier this month, alongside its plans to help ensure "UK security of supply this winter” and “strong pumped storage performance”.  

Its core business of burning wood for energy also performed well in the first half because of high electricity prices. Pellet production was up 54 per cent to 2mn tonnes (t), with only a 2 per cent increase in production costs. The input mix shifted more toward sawmill residue, while the “low-grade round wood” environmental campaigners say should be left as a key part of animal microhabitats dropped from 16 per cent to 11 per cent of pellets. 

Consensus estimates compiled by FactSet show full-year cash profits at £645mn, increased from £605mn on the back of these interim numbers. Burning wood for energy still seems like a 19th century throwback, but the stability and cost effectiveness sure looks like a positive in these straightened times. Buy. 

Last IC View: Buy, 382p, 26 Feb 2021