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    DRX   GB00B1VNSX38

DRAX GROUP PLC

(DRX)
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SummaryMost relevantAll NewsAnalyst Reco.Other languagesPress ReleasesOfficial PublicationsSector newsMarketScreener Strategies

Drax Group plc : Popular, yet contrarian

11/02/2021 | 05:35am EST

British energy producer Drax Group has been a successful yet peculiar shareholding — as it achieves the unusual feat of being both fashionable and resolutely contrarian — held within Europa One, the investment fund advised by MarketScreener on an exclusive basis.

Fashionable because, like all major energy producers, Drax is rapidly shifting its portfolio towards renewables — in fact the group stands far ahead of peers as it already completed its transition. This latter is no longer a coquetry but a strict imperative to meet the ESG criteria now required by institutional investors, which traditionally form big energy companies' shareholder bases.

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Exit coal, then. Operated by Drax, the Selby site, once the largest in the UK, cased burning the loathed combustible last spring. Following the sale of its four gas-fired power plants to trading company Vitol, and the abandonment of the mega-conversion project at Selby, natural gas is a goner as well, at least for now.

In effect, Drax is prudently saving an option to build four smaller open cycle gas-fired plants, which are less profitable and less environmentally friendly than their combined cycle alternatives, but more flexible and therefore better able to respond to emergencies during demand peaks. Current distress in European energy markets certainly pleads in favor of such latitude.

In practice, Drax went all-in on solid biomass, and more precisely on the combustion of wood pellets. Betting the house on this distinctive positioning, the group has developed and partly integrated an entire value chain from forestry to logistics and distribution between North America and Europe.

Starting early enabled it to become the leading producer of renewables in the United Kingdom, accounting for roughly 12% of "clean" production nationwide, with a capacity of 7.4TWh at the end of last semester. 96% of Drax's renewable production is derived from biomass, with the remainder coming from hydro power.

Drax also supplies several of its peers — including Uniper, Mitsui, RWE or Sumitomo — with biomass. A key strategic focus over the next decade should be the establishment of PPAs (“Power Purchase Agreements”), i.e private contracts signed directly between energy producers and large companies, which themselves have to comply with stringent ESG standards.

Financially speaking the transition was well-conducted, thanks in particular to the subsidy-generous British legislator. Revenue has grown while operating cash-flows remained stable. It should be noted, however, that the billion pounds spent on acquisitions to develop the biomass supply chain since 2016 led to an equal increase of indebtedness.

That's for the fashionable part. As stated above, despite all its ESG appeal, Drax does come across as a fairly contrarian investment. The group has been the target of fierce criticism — and even subject of a formal complaint lodged by a powerful environmental lobby to the OECD — regarding the questionable ecological character of solid biomass.

Burning wood has long been suspected of causing more harm than good with respect to carbon emissions — maritime transport included — and deforestation. This debate entails another concern with Drax' actual earning power, which still remains highly dependent on subsidies, themselves conditioned by the "renewable" nature of solid biomass.

A reclassification would undoubtedly have damaging consequences, even though the board of directors brushed off what they claim are unfounded attacks. In effect, Drax explains that its strategy is entirely modeled after the IPCC's — the intergovernmental body of the United Nations responsible for advancing knowledge on human-induced climate change — recommendations.

Analysts — whose consensus is surveyed in real-time by MarketScreener — are sharing the same view. It is this combined set-up of ESG momentum and contrarianism that drove the investment decision earlier this year. Now that valuation — primarily based on dividends — has appreciated, the situation admittedly lost some of its appeal.

Nevertheless, like all other energy companies in Europe, Drax should deliver record earnings this year. As the cold season begins, that trend will continue if distress on electricity markets persists — so momentum has perhaps yet to run dry.


© MarketScreener.com 2021
Stocks mentioned in the article
ChangeLast1st jan.
DRAX GROUP PLC -0.85% 581 Delayed Quote.54.93%
EUROPA ONE I -0.11% 126.16 End-of-day quote.21.03%
EUROPA ONE R -0.12% 164.36 End-of-day quote.20.11%
MITSUI & CO., LTD. 2.64% 2621.5 End-of-day quote.38.74%
RWE AG -0.31% 35.1 Delayed Quote.1.53%
S&P GSCI NATURAL GAS INDEX 1.39% 175.7093 Delayed Quote.67.51%
SUMITOMO MITSUI FINANCIAL GROUP, INC. 1.95% 3915 End-of-day quote.22.80%
UNIPER SE 1.35% 39.83 Delayed Quote.41.04%
US DOLLAR / RUSSIAN ROUBLE (USD/RUB) -0.08% 73.9425 Delayed Quote.0.47%
All news about DRAX GROUP PLC
05:32aDRAX : Selby College and Drax secure funding to support the green workforce of the future
PU
12/02MarketScreener's World Press Review - December 2, 2021
12/02Citigroup Lowers Drax Group To Neutral From Buy, Lifts PT
MT
12/01JPMorgan Raises Drax Group PT, Keeps Overweight Rating
MT
12/01UK's Drax to double biomass production capacity, sales by 2030
RE
12/01Drax Expects FY21 Adjusted EBITDA at Upper End of Analyst Forecast Range
MT
11/30Credit Suisse Downgrades Drax Group To Neutral, Rises PT
MT
11/25DRAX : employees donate £2500 to local charaties
PU
11/18DRAX : Biomass launches ‘classroom of the month' initiative to boost education for L..
PU
11/18DRAX : Community events to discuss Drax's Cruachan expansion
PU
More news
Analyst Recommendations on DRAX GROUP PLC
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Financials
Sales 2021 4 650 M 6 160 M 6 160 M
Net income 2021 107 M 141 M 141 M
Net Debt 2021 1 028 M 1 362 M 1 362 M
P/E ratio 2021 21,0x
Yield 2021 3,23%
Capitalization 2 319 M 3 067 M 3 073 M
EV / Sales 2021 0,72x
EV / Sales 2022 0,59x
Nbr of Employees 2 897
Free-Float 96,4%
Upcoming event on DRAX GROUP PLC
Income Statement Evolution
Consensus
Sell
Buy
Mean consensus OUTPERFORM
Number of Analysts 9
Last Close Price 581,00 GBX
Average target price 691,78 GBX
Spread / Average Target 19,1%
EPS Revisions
Managers and Directors
Dwight Daniel Willard Gardiner Chief Executive Officer & Executive Director
Andrew Keith Skelton Chief Financial Officer & Director
Philip Gotsall Cox Chairman
David Nussbaum Senior Independent Non-Executive Director
Nicola Hodson Independent Non-Executive Director
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