Drax Group: Very little new in H1

Research evidence excerpt

Drax Group: Very little new in H1

Forecast returns

Forecast price appreciation -1.9%

Forecast dividend yield 4.4%

Forecast stock return 2.5%

Market return assumption 9.2%

Forecast excess return -6.7%

Company Description

The core Drax asset is the power station in Yorkshire, where there is 2.6GW of capacity spread

across four units. The assets burn c7.5m tonnes of biomass p.a. Support ends in March 2027,

and Drax is seeking an extension to the support, and support for bioenergy carbon capture

and storage (a means to negative emissions). Drax pelletises biomass in North America where

it has c5m tonnes p.a. nameplate capacity. The company also owns a 440MW pumped

storage facility at Cruachan, which it is seeking to expand. There are three OCGTs under

construction, due to complete in 2026.

Valuation Method and Risk Statement

Drax:

Utilities face a wide range of commercial, technical, operating, regulatory and political or

policy risks which can be hard to assess completely, including the risk of adverse

developments in the framework for regulated utility network as well as commodity and

regulatory risk in power generation, retail and other areas. Valuation methods in the sector

include sum-of-the-parts analysis cross-checked with peer multiples and divisional DCFs. We

value Drax on the basis of a SOTP, backed by a segment-by-segment DCF. We benchmark our

valuation against EV/EBITDA multiples. We value the bioenergy units in Yorkshire, England

until 2034. We value flow-back of working capital and RO certificates as subsidies and units

ramp down. We value the OCGTs until 2045, when we anticipate the assets will close and be

replaced in the system by batteries or demand-side response. We assume that the pumped

storage requires repowering and do not value it beyond 2050.