In April last year, I said Draxwas a sell'. It looked expensive on 18 times expected earnings, and I thought future profits would be hit by carbon emissions allowances costs, and as it made its power station comply with regulations.A plan to convert from coal to biomass looked to be stuck in the starting gates.
But events have proved me wrong. Although profits in 2013 are set to be lower than in 2012, Drax's (LSE: DRX)prospects may have been transformed by the government, which last week agreed to let it charge a minimum of £105 per megawatt hour (more than twice the current market price) for the electricity it generates from burning biomass (mainly wood pellets).
This runs until 2021, and looks good enough to underpin its £700m investment in turning half of the power station to biomass.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
UBS reckons it makes Drax a more attractive takeover target: a bidder could justify paying more than £10 a share, or even £12 if four of the six power units are converted. Barclays Capital reckons Drax could end up paying out up to £1.5bn to shareholders in a few years' time.
Drax now trades on over 22 times next year's earnings. But analysts expect profits to almost double over the next three years. With coal-generated electricity a lot more profitable than gas generated, the medium term looks rosy. ]
It may be worth considering how long the price guarantee will last a future government could change its mind, particularly as it will mean higher electricity bills. But no one seems worried at the moment.
Verdict: hold if you own
-
What happens if you can’t pay your tax bill, and what is "Time to Pay"?Millions are due to file their tax return this Friday as the self-assessment deadline closes. Though the nightmare is not over until you pay the taxman what you owe - or face a penalty. But what happens if you can't afford to pay HMRC your tax bill, and what is "Time to Pay"?
-
What does Rachel Reeves’s plan for growth mean for UK investors?Rachel Reeves says she is going “further and faster” to kickstart the UK economy, but investors are unlikely to be persuaded
