Drax Group PLC (LON: DRX) – UK’s largest source of renewable power by output.

Drax Group PLC is an FTSE 250 Index listed power generation company, which has been listed on the London Stock Exchange since 15th December 2005. The Company has its base in Selby, the United Kingdom. DRX is a producer of low carbon and renewable electricity. Its core activities are – Pellet production, which produces wood pellets; Power Generation, which provides a portfolio of low-carbon, flexible and renewable power generation in the United Kingdom; B2B Energy Supply, which caters to the supply of renewable energy solutions to businesses and industrial customers. The Company has a target of becoming carbon negative by 2030.

Recent trend of dividend payments

 (Data Source: LSE Website, Research done by Kalkine Group)

The chart above demonstrates the consistent and progressive dividend payment done by DRX from FY2017 to FY2020. In FY2021, DRX would pay an interim dividend of GBX 7.50 per share. It would be paid on 8 October 2021 and has an ex-dividend date of 26 August 2021.

United Kingdom renewable energy market

As per the industry experts, the renewable energy market in the UK is expected to grow at a CAGR of more than 9% between FY2021 to FY2026. Factors such as the rising demand for renewable energy sources amid the urgency to reduce carbon emissions and supportive government policies are driving the growth of the renewable energy market. There is a high growth rate of wind energy in the UK, which makes it one of the renewable market leaders. In early 2021, the UK government announced that its renewable electricity outpaced its fossil fuel generation. Renewable energy is likely to remain the largest source of electricity in the future in the UK, as per the government.

 Growth Prospects

• Supportive government policies: The UK government, in June 2019, committed to achieving net-zero carbon emissions by 2050 by passing a law. It would drive the growth of the renewable energy market.
• Rising demand for renewable energy sources: The costs of renewable technologies are declining and could compete with fossil fuel sources. Furthermore, there is a trend of reduced dependency on fossil fuels to reduce carbon emissions. These two factors are contributing to the rising demand for renewable energy sources.
• Acquisition of Pinnacle: The Company recently acquired Pinnacle. It made DRX the world's leading sustainable biomass generation and supply business. Furthermore, the acquisition transformed the Company’s supply chain.
• Progress towards a negative carbon future: DRX made significant progress towards a negative carbon future. It has sold its gas generation assets and ended its commercial coal operations. Furthermore, DRX has reduced its generation emissions by more than 90% since 2012.

Key Risks 

• Capital intensity: The industry is very capital-intensive. The infrastructures are expensive and require continuous upgrades and maintenance.
• Potential lack of synergy from the Pinnacle acquisition: Any failure to achieve the desired synergy from the Pinnacle acquisition could increase costs and reduce revenues, affecting the margin of DRX.
• Potential changes in regulatory frameworks: There could be changes in the regulatory frameworks. Any failure to meet all legal and regulatory obligations could negatively impact operational and financial performance.
• Adverse weather conditions: Adverse weather conditions could lead to disruption in projects and consequently time and cost overruns.
  

Now we will analyse some key fundamental and shareholders statistics of Drax Group PLC.

Recent Development 

UK government to investigate green electricity tariffs: On 16 August 2021, it came to light that the UK government had launched an investigation into renewable electricity deals and would review green retail electricity tariffs. There are concerns of exaggeration by the energy companies about the environmental benefits of their products to customers.

Financial and Operational Highlights (for the six months ended 30 June 2021 as of 29 July 2021)

(Source: LSE Website)

• The Company is developing complementary biomass strategies and creating an entity that would provide the world’s leading sustainable biomass generation and supply.
• Driven by this strategy, DRX has reduced emissions by more than 90% since 2012.
• DRX acquired Pinnacle Renewable Energy Inc for £222 million. Also, it sold gas generation assets for £186 million.
• Driven by its solid performance in H1 FY2021, adjusted EBITDA rose by £7 million YoY to £186 million.
• DRX had strong underlying cash conversion, with cash generated from operations of £138 million in H1 FY2021. It led to a strong liquidity position of total cash and committed facilities of £666 million.
• Driven by improved liquidity, DRX increased the interim dividend by 10% YoY in H1 FY2021.

Financial Ratios (H1 FY2021)

Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 16 August 2021, at 10:25 AM GMT, DRX’s shares were trading at GBX 419.20, down by 0.66% against the previous day closing price. Stock 52-week High and Low were GBX 459.60 and GBX 248.49, respectively.

On a daily chart, DRX's price is sustaining above 20-day EMA of about GBX 413.90 and 20-day SMA of about GBX 411.30, indicating the possibility of an upward movement.

In the last year, DRX’s stock has delivered a decent positive return of ~50.18%. Also, it has outperformed the FTSE All-Share Utilities index with a return of about 28.97% and the FTSE 250 index with a return of about 48.08%. 

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

DRX delivered a solid performance in H1 FY2021, with adjusted EBITDA rising £7 million YoY. The acquisition of Pinnacle made DRX the world's leading sustainable biomass generation and supply business. There are more growth opportunities due to the need for more renewables, negative emissions and more flexible energy systems. The Company could benefit from supportive government policies, rising demand for renewable energy sources, its acquisition of Pinnacle and strong progress towards a negative carbon future going into H2 FY2021. The management remains focused on the expansion of its biomass options and strives to realise a zero-carbon, lower-cost energy future.

Considering the supportive government policies, the acquisition of Pinnacle, the Company’s continued investments into a negative carbon future, the better leverage position of the business than the industry, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Drax Group Plc at the current price of GBX 419.20 (as on 16 August 2021 at 10:25 AM GMT), with lower-double digit upside potential based on 18.45x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached. Resistance level 2 is at 52 week high and if Drax Group Plc attains momentum or breach it, then target price as per valuation table could be seen in the near term as per technical chart analysis.

*All forecasted figures and Peer information have been taken from Refinitiv.

*The dividend yield is subject to change as per the stock price movement.

*The reference data in this report has been partly sourced from Refinitiv.

Disclaimer

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