Drax Group Plc (DRX) is an electricity company mainly focused on providing low-cost energy. The company’s operations are divided into 3 businesses being B2B Energy supply and solutions, Biomass production and Power generation and system services. Under Power generation and system services business, the company operates multiple power stations which include Drax Power station, Cruachan Power Station, Hydro-electric power stations and combined cycle gas turbines. Biomass production business monitors the performance of Daldowie Fuel Plant and Drax Biomass. The company’s B2B energy supply and solutions business operate Haven Power and Opus Energy. Drax Power station is the biggest decarbonisation project in the European Region and is the largest renewable generator in the United Kingdom.
The current Chairman is Philip Cox CBE and was appointed to the board in 2015. Will Gardiner held the responsibilities of the Chief Executive Officer and was appointed as CEO in January 2018. Andy Skelton holds the responsibilities of Chief Financial officer.

Key Statistics



Top Shareholders

 

Recent News

On 19th September 2019, Philip Cox, Chairman and non-executive director of the company announced that he would be stepping down from his position of non-executive director and Chairman at Kier Group plc.

Segments

The company’s operations are divided into three reportable segments being Generation, Pellet Production and Customers. The company’s generation segment takes care of all the activities related to power generation in the United Kingdom. The Pellet Production segment takes care of all the activities related to the production of compressed wood pellets in the company’s processing facilities based in the United States. The company’s Customers segment is involved in the activities related to the supply of gas and electricity to the UK based business customers. In the first half of the financial year 2019, the company’s revenue from all the segments had increased as against last year data which include Generation, Customers and Pellet Production. The company’s gross profit had surged from its Generation and Pellet Production segments for the period. The company’s Adjusted EBITDA had surged from its Generation segments for the period.

Financial Highlights – H1 Financial Year 2019 (£, million)


(Source: Interim Report, Company Website)
 
In the first half of the financial year 2019, the company’s reported revenue increased to £2,232.4 million from £2,068.5 million in the H1 FY2018. The increase in the revenue was driven by a decent growth delivered by all reportable segments, especially the generation business for the current period. Driven by revenue growth, the company’s reported gross profit surged to £365.1 million in H1 FY2019 from £302.4 million in the H1 FY2018. The group’s adjusted EBITDA surged by 35.83 per cent from £101.6 million in the H1 FY2018 to £138 million in H1 FY2019. The company’s underlying operating profit increased to £35.4 million in H1 FY2019 from an underlying operating profit of £17.8 million in the H1 FY2018. The reported operating profit stood at £34.1 million in H1 FY2019 versus a reported operating profit of £12.3 million in the H1 FY2018. The company’s underlying PBT (Profit before tax) increased to £7.1 million in H1 FY2019 from an underlying PBT (Profit before tax) of £1.4 million in the H1 FY2018. The reported PBT (Profit before tax) stood at £3.5 million in H1 FY2019 versus an LBT (loss before tax) of £11.3 million in the H1 FY2018. The underlying PAT (Profit after tax) attributable to the shareholders stood at £7.8 million in H1 FY2019 versus an underlying PAT (Profit after tax) attributable to the shareholders of £6.6 million in the H1 FY2018. The Reported PAT (Profit after tax) attributable to the shareholders stood at £3.9 million in H1 FY2019 versus an underlying LAT (loss after tax) attributable to the shareholders of £4 million in the H1 FY2018. The company’s underlying basic and diluted earnings per share stood at 2 pence in H1 FY2019 versus an underlying basic and diluted earnings per share of 1.6 pence in H1 FY2018. The company’s reported basic and diluted earnings per share stood at 1 pence in H1 FY2019 versus reported basic and diluted loss per share of 1 pence in H1 FY2018. The net cash from operating activities stood at £197 million in H1 FY2019 as against £112 million in the H1 FY2018. The interim dividend was up by 12.5 per cent from £22 million (5.6 pence per share) in H1 FY2018 to £25 million (6.4 pence per share) in H1 FY2019.

Key Performance Indicators

Cost of Production
Cost of Production is used by the company to measure its operational efficiency. In the financial year 2018, the company’s Cost of Production declined to 9.4 $/GJ ($/gigajoule) from 10.4 $/GJ in the financial year 2017.
Biomass unit technical availability

Biomass unit technical availability gives the benefit that can be derived from increasing biomass unit output. The company’s Biomass unit technical availability stood at 91 per cent in the financial year 2018 versus 79 per cent in the financial year 2017.

Value from flexibility
Value from flexibility helps the company to capture the total available value from the fully optimized grid. The company achieved £79 million Value from flexibility which was above the set targets but was less than the FY2017 data by £9 million, due to not extension of an ancillary services contract.

Growth in market share
The company had increased its market share by 0.8 per cent in the financial year 2018. The increase in the market share was above the low set target of 0.6 per cent by the company.

Financial Ratios


 
The reported gross margin in the H1 FY2019 increased by 2.9 per cent to 16.3 per cent against 13.4 per cent reported last year for the same period. The reported EBITDA margin of 6.2 per cent for the H1 FY2019 stood higher when compared to the last year same period data. The reported operating margin in H1 FY2019 increased by 1.2 per cent to 1.4 per cent from 0.2 per cent reported last year for the same period. Net margin reported was 0.2 per cent for the first half of the financial year 2019, reflecting an increase of 0.4 per cent when comparedwith last year data for the same period. Return on equity for the first half of the Financial year 2019 stood at 0.2 per cent, which was lower than the industry median of 4.6 per cent but higher when compared to the last year same period data. On the liquidity front, Drax Group Plc’s current ratio in H1 FY2019 was lower than the industry median of 1.42, reflecting insufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the DRX Plc’s was 0.64x, which was lower as compared to the industry median of 1.32x, reflecting that the company is less leveraged as compared to its peers.  
 
Share Price Performance


Daily Chart as at September-23-19, before the market close (Source: Thomson Reuters)

On September 23, 2019, at the time of writing (before the market close, at 11:18 AM GMT), Drax Group Plc shares were trading at GBX 276.80, down by 5.14 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 432.69/GBX 259.80. At the time of writing, the share was trading 36.02 per cent lower than the 52w High and 6.54 per cent higher than the 52w low.Stock’s average traded volume for 5 days was 1,741,467.00; 30 days – 1,020,187.73 and 90 days – 997,051.41. The average traded volume for 5 days was up by 70.70 per cent as compared to 30 days average traded volume. The company’s stock beta was 1.47, reflecting high volatility as compared to the benchmark index. The outstanding market capitalisation was around £1.16 billion, with a dividend yield of 5.11 per cent.

Valuation Methodology
Method 1: Price to Cash Flow Approach (NTM)



To compare Drax Group Plc with its peers, Price/Cash Flow multiple has been used. The peers are Centrica Plc (NTM Price/Cash Flow was 2.92), ContourGlobal Plc (NTM Price/Cash Flow was 4.93), United Utilities Group Plc (NTM Price/Cash Flow was 6.53), Severn Trent Plc (NTM Price/Cash Flow was 7.25) and National Grid Plc (NTM Price/Cash Flow was 7.28). The Average of Price/Cash Flow (NTM) of the company’s peers was 5.80x (approx.)

Method 2: Price to Earnings Approach (NTM)



To compare Drax Group Plc with its peers, Price/Earnings multiple has been used. The peers are Centrica Plc (NTM Price/Earnings was 8.16), ABO Wind AG (NTM Price/Earnings was 9.29), ContourGlobal Plc (NTM Price/Earnings was 11.83), SSE Plc (NTM Price/Earnings was 12.91) and Severn Trent Plc (NTM Price/Earnings was 16.68). The average of Price/Earnings (NTM) of the company’s peers was 11.77x (approx.)

Growth and Risk Assessments

The company is actively looking forward to investment opportunities for growth in its core businesses. The company is following renewable, low carbon and flexible approach to deliver higher operational growth with high-quality earnings. Drax Group Plc is looking forward to expanding its generation portfolio and system support services provisions for the period. Furthermore, the sector is exposed to political, financial and operational risks, each of which has the potential to impact company/industry performance significantly.

Conclusion

The company had shown decent financial performance for the first half of the financial year 2019. Both the top-line and bottom-line performance for the period has improved. The company’s generation business has been performing strongly with the higher contracted position. The company expects higher production in the second half of the financial year from its biomass business.

The company’s Pellet production business is more focussed on improving quality, reducing costs, and expects an increase in production in the second half. The company’s customers business is focused on increasing its gross profit by reduction of its bad debt and cost to serve.

The company is looking forward to growth investment options through biomass capacity expansion, new gas generation and cost reduction. The company has proposed a dividend of £63 million in the financial year 2019, which was 12.5 per cent more than the FY2018.

Over the course of 5 years (FY13 - FY18), the company’s operating income surged from £2,062.10 million in FY13 to £4,237.30 million in FY18. Compound annual growth rate (CAGR) stood at 15.49 per cent.

Based on the decent prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the current price of GBX 276.80 (as on 23rd September 2019) with high single-digit upside potential based on 5.80x NTM Price/Cash Flow (approx.) on FY19E cash flow per share (approx.) and 11.77x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.).

*All forecasted figures and peers have been taken from Thomson Reuters.

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.
References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.
This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.
The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.
Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.