Drax Group Plc Ordinary 11 16/29p (DRX)

Company overview

HL Update (5 August 2008)

The power group’s recent half year results (05Aug08) saw the recent trend of declining earnings continue. Adjusted earnings before interest, tax and exceptional items decline by 28.5pc to £206m, as increases in average power prices achieved and power volumes sold were more than offset by higher coal prices paid and carbon costs suffered. As for the accompanying management statement, the board continues to focus on operational efficiency, improving the group’s environmental footprint whilst also looking to boost generation output. On balance, market consensus opinion is currently neutral in tone.

HL Comment (19 May 2008)

There are six power generators operating at the North Yorkshire site, generating a power output of some 4,000 megawatts – enough to meet around 7pc of demand in the UK. It is around twice the size of the next largest Coal Power station in the UK. Along with the sale of electricity, the group also sells by-products from the electricity generation process. On average, Drax produces 1.4 million tonnes of pulverised fuel ash, of which 65pc to 70pc is sold – most of which is used in the formation of building blocks for the construction industry. Drax is also keen to promote its environmental credentials, with its website noting that each of its six generating towers is fitted with filters in order to reduce the polluting by-products which form part of the generating process.

Having come to the London stockmarket in December 2005, the group was promoted back into the FTSE-100 index (the UK’s premier index) as of late June (2008), buoyed predominantly by takeover speculation throughout the sector. The group’s full year results announced back in early March (2008) saw adjusted earnings before interest, tax and exceptional items decline by 13.2pc to £506m, as the company suffered from a combination of unseasonally warm weather conditions – hitting demand for power – and the impact of rising coal prices. However, market conditions have subsequently improved and the company’s mid May trading update highlighted expectations for modestly higher profits than previously forecast.

Acting for positive considerations, consolidation across the industry remains an ongoing possibility and some improvement in operating conditions at the company has recently been enjoyed. On the negative, concerns in relation to worries over future UK government and European Union emission quotas remain - having to start paying for carbon credits post 2013, under phase three of the EU emissions trading scheme, is likely to hit profitability. Furthermore, valuation is a current concern for some analysts, with the shares having gained by around 45pc (as of 20June08) over just the last three months alone, underwritten by takeover hopes. On balance, market consensus opinion currently denotes a weak hold.

All yield figures are variable and not guaranteed.

Fundamental Data