Drax returns some excess profits to shareholders

High energy prices helped Drax Group (DRX) increase its year-on-year adjusted cash profit (Ebitda) by 101 per cent to £453mn in the six months to June. Excluding the effects of the government's windfall tax, which will run to 2028, adjusted cash profit rose 85 per cent.

Pumped storage and hydro-adjusted cash profit almost tripled to £154mn. However, this strong performance won’t be matched in the second half of the year. The company expects second-half profit to drop because, it notes, “forward power prices have reduced” and it is unlikely they will return to the highs of 2022 for a while. The rest of its profit generation comes from its biomass business. The slowdown means consensus analyst forecasts see revenue for the full-year as reaching £7.8bn, down from £8.2bn last year.

Drax is handing some of the extra profits of the past couple of years to shareholders. It now expects the full-year dividend to rise 10 per cent to 23.1p a share.

It is planning to increase full-year capital spending to between £520mn and £580mn. Over £300mn is being spent on pellet plants and open cycle gas turbines, while the rest is being spent on maintenance. It is still urging the UK government to support is biomass and carbon capture facility system in the UK, but is moving ahead with its two sites in the US in the meantime.

Analysts are bullish, with FactSet consensus expecting cash profit to rise to £1.2bn next year. However, the fall in energy prices and controversy around its biomass business, which emits a lot of carbon, creates regulatory risks. Hold.

Last IC View: Hold, 641p, 23 Feb 2023