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Shares in alternative energy producer Drax Power (LON:DRX) are on the move this week, highlighting an energy stock which holds out some potential for substantial growth over the next decade or so. Shares have moved on the back of a bullish trading update announced yesterday with 2021 adjusted EBITDA around the top end of current analysts’ expectations.

The company said it is aiming to double sustainable biomass production capacity by 2030. Drax has also recently reported that it is looking at building a biomass plant in the US for power generation that will absorb more emissions than it creates. This is the kind of net zero project that gets investors recovering from the COP 26 hangover excited.

Who is Drax Power?

Drax Power is a UK energy company that has converted its power stations from coal to the use of biomass pellets. It only uses wood residuals or by-products from trees that are primarily used for lumber. It has four sites located across England and Scotland.

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The company operates a global bioenergy supply business with manufacturing facilities at 13 sites in the US and Canada, and produces compressed wood pellets for its own use and also for other companies in Europe and Asia. In 2019 it announced that it had an ambition to be carbon negative by 2030.

What we like about Drax Power

The share price has positive momentum and the latest forecasts from the company have helped to lift that further. Shares are up from the 400p level and are starting to probe 600p. Investors have seen some very solid upside from the company, which has a £2.2bn market cap, since September. Relative strength is looking good across the board.

Dividend growth is also looking good and there is plenty of cash on the balance sheet right now. The company is extremely well positioned in our view as one that has the opportunity to make a realistic contribution to the net zero economy. We also like the fact that it is not restricting itself to the UK market and is looking to continue to develop opportunities in the US and Canada, which could be substantial.

The 12 month forecast PE ratio also signals the stock as looking cheap, despite the recent hike in the stock price. The company is operating in the energy space and we anticipate the sector will have a bumper year in 2022.

What we don’t like about Drax Power

The company fails to score a perfect 10 for us: operating profits are off again as is the operating margin when compared versus achievements in 2019. Gross gearing is 117%, which we don’t like to see. Net gearing is 86.56%. Net income and normalised EPS are also slumping. It is hard to make a clear call on this one as the company is obviously still refocusing its efforts.

Forecast EPS is however looking good. We will be continuing to keep an eye on the stock and should the price drop it could represent a long term bargain play in this sector for investors looking for exposure in UK green energy. The business is a substantial one, with over 3000 employees and market cap of £2.2bn.

Related

Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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