- Drax profits soar on higher power prices
- Wood-burning business continues to face heavy scrutiny
Drax (DRX) was given a golden opportunity in 2022 as the focus switched to energy security in the UK and elsewhere, and its significant dispatchable, renewable power generation meant it was able to maintain supply to the grid and ramp up profits.
Its adjusted cash profit for the year hit £731mn, up from £398mn. This was driven by the generation division, which saw its adjusted cash profit almost double to £696mn. This was split between its biomass power plants and the company’s hydroelectric and pumped hydro capacity, which together with its waste energy plant brought in £171mn of that cash profit. Chief executive Will Gardiner said the importance of the company’s dispatchable power supply would “grow over time, as intermittent power sources grow”.
Drax also produces its own wood pellets for its biomass power plants, and third-party sales from this unit increased its profits by 56 per cent to £134mn off the back of higher volumes and prices for biomass in Europe.
The company is doubling down on this business. It commissioned three new pellet plants in 2022 and bought another, as well as giving the green light to another new project and expansion. These plants are all in North America, with the pellets then shipped across the pond.
There are still reputational risks. The BBC aired a report saying the company was cutting down good trees and turning them into pellets last year, bringing on a robust defence from Drax, which said footage of good trees being turned into pellets was misleading.
Analyst forecasts indicate there is plenty of bullishness about this business model – consensus is for cash profits to double again by 2024, to over £1.6bn. But there are still regulatory risks here given Drax's business– it is the UK’s single biggest emitter of CO2 and brought in almost £900mn in government subsidies in 2021 (according to Ember Climate, an environmental non-profit think tank). As it pushes for further integration of biomass burning in the UK’s energy system, we see a rockier road ahead. Move to hold.
Last IC View: Buy, 763p, 26 Jul 2022
| DRAX GROUP (DRX) | ||||
| ORD PRICE: | 641p | MARKET VALUE: | £2.6bn | |
| TOUCH: | 641-643p | 12-MONTH HIGH: | 846p | LOW: 467p |
| DIVIDEND YIELD: | 3.3% | PE RATIO: | 30 | |
| NET ASSET VALUE: | 327p* | NET DEBT | 104% | |
| Year to 31 Dec | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
| 2018 | 4.23 | 14.0 | 5.00 | 14.1 |
| 2019 | 4.71 | -2.80 | 0.10 | 15.9 |
| 2020 | 4.20 | -235 | -49.0 | 17.1 |
| 2021 | 5.08 | 122 | 13.9 | 18.8 |
| 2022 | 7.77 | 78.0 | 21.3 | 21.0 |
| % change | +53 | -36 | +53 | +12 |
| Ex-div: | 20 Apr | |||
| Payment: | 19 May | |||
| *Includes intangible assets of £567mn, or 141p a share | ||||
