Drax- Cruachan Trading Strongly

Drax’s trading update confirms consensus expectations and the pumped hydro business in particular is seeing strong performance. Biomass is also finding new outlets with demand from a growing biofuels market and we see this continuing in the medium term. We have increased our forecasts for FY23 and FY 24 to reflect better capture of power market volatility at Cruachan putting EBTIDA at £1,158m and £1,181m respectively and our central valuation moves to 1063p from 1049p.

Drax Group - Canadian Support for BECCS

Support for bioenergy with carbon capture and storage (BECCS) has been given a boost through the inclusion of supportive legislative proposals in Canada’s Fall Economic Statement. This follows strong support from the UK Government in its August Biomass Strategy which included a clear analysis of the science. Drax is targeting annual CO2 removals in North America of 6Mt by 2030 and this move increases the potential for developing well-supported projects in our view.

LIBERUM: New Energy Nuggets: Hydrogen - the future is green

Drax- NAO Report About Value for Money

The National Audit Office (NAO) report into the UK government’s support for biomass is about checking that policy represents value for money and a normal response to policy announcements. We see Drax’s BECCS deployment as the only near-term solution at scale that can create negative emissions and it is difficult to see alternatives as offering better value for money in our view.

Drax Group - Government Backs BECCS

The UK government has today published its Biomass Strategy which includes clear support for bioenergy with carbon capture and storage (BECCS). The strategy is based on an analysis of the science summarised in a separate policy paper prepared by the Department for Energy Security and Net Zero’s Task and Finish Group. Another report examines issues around the public dialogue on the issue which at best remains divided. This has resulted in policy support for biomass and BECCS being seen as a key ri

Drax Group - System Support Drives Growth

Drax’s first half results show that it continues to benefit from providing key system support and flexibility to the GB power market. Generation has been particularly strong with a volatile market and forward sales driving notable strong performance in the pumped storage and hydro assets. Pellet production has also shown some modest growth despite outages and the customer business is very much back on track post COVID. Going forward the company continues to make progress on the development of it

Drax Group - Building a Global BECCS Business

Drax has issued an update ahead of its capital markets day which it will hold this afternoon. It has developed its ambition to build a major global business based on the negative emission bioenergy and carbon capture (BECCS). Last year’s IPCC working group three (WG3) report now part of the sixth assessment report made clear the need for carbon dioxide removal (CDR) with up to 9.5bn tonnes of CDR needed by 2050. BECCS remains the most immediately available CDR technologies deliverable at scale.

Drax Group - Guidance In Line

The Drax trading update reaffirms guidance in line with market consensus with higher pellet production costs offset by continued strong generation trading and notably system support sales. The UK governments commitment to BECCS has been made clear and is necessary to hit the country’s GHG reduction target for 2030 but timing uncertainty means slower immediate investment in UK BECCS from Drax. Investors are rewarded with a £150m share buy back programme running for the rest of the year.

Drax Group - UK BECCS Remains Under Assessment

The decision by the UK Government not to select Drax for its Track-1 carbon capture programme does not mean that the Government has walked away from supporting Drax’s UK BECCS ambitions. Support will continue to be assessed under a separate process. We see limited alternatives to meeting the government target of removing 5Mtpa of CO2 but the uncertainty of the process shifts focus to Drax’s opportunities in North America. Additional support for long duration storage is also part of the governmen

Drax Group - Flexibility Revealed

We think the strong performance from the Drax pumped storage gives grounds for upside as it demonstrates the flexibility the company has across its GB portfolio. We have upgraded our numbers on a better, long term storage spread compared with FY 21 and our central case valuation rises to 1,111p from 1,030p as a result. Our central case now also includes the assumption of CCS on two units at Drax.

Drax Group - Pumped Storage Drives Strong Results

Drax has beaten expectations with its full year results largely as a result of strong performance from its pumped storage asset at Cruachan in Scotland. With the GB system seeing a higher spread between peak and off peak prices the asset has benefited from trading but also from more provision of system support services. While these effects may not be so pronounced in FY 23 we see the asset continuing to perform strongly. Combined with the dispatchable biomass assets, Drax is fulfilling its ambit

Drax Group - Capacity Market Success

Success in the T-4 Capacity Market auction for Drax adds to the existing benefits of the company’s pumped storage and hydro assets. This auction was largely driven by other battery storage assets entering the market and we see this as potentially positive for pricing in future auctions. Drax has already signalled that the Cruachan Pumped Storage project did well in FY 22 and we expect this to be confirmed in the preliminary results statement due tomorrow.

A Car Without Brakes - Opportunities in Electricity Storage

Electricity storage and especially long duration storage is essential to deliver decarbonisation with a total addressable market of a similar order of magnitude to that for hydrogen, biofuels or carbon capture. It has the potential to become a major sub sector of the energy market.

Where Clean Energy Develops In 2023

We see three key sectors of the clean energy universe as making progress in 2023. Carbon capture and storage (CCS) will benefit from US tax incentives, long duration energy storage will benefit from volatile pricing and higher lithium prices and hydrogen has the potential to recover from demand uncertainty driven by a rather polarised debate on its uses. The markets will be challenging but the strengths of the opportunity remain strong.

Drax Group - Hiccup In An Unprecedented Market

A fine for an inadvertent rules breach feels to us like a symptom of an unusually volatile market in which Drax is working hard to maximise value. We continue to see the Cruachan asset as benefiting strongly in the current market because it can deliver the flexibility that volatile demand and supply require. Drax has already reviewed procedures, but we do not see changes as materially affecting the value of the asset or the company’s trading ability.

PROGRESSIVE: Oxford Metrics: Drivers to growth and catalysts for rerating

Oxford Metrics’ results for the year to 30 September show a business that is growing strongly, driven by long-term technology, economic and demographic trends across the life sciences, entertainment and engineering markets. The results are in line with the trading update given on 25 October (see our note) that showed revenue and adjusted PBT ahead of our, and market, expectations. With a confident management commentary on the outlook, we raise our estimates for FY24E and introduce forecasts for

ITM Power (ITM LN) - Trading update

ITM has released a trading update, providing guidance on its upcoming H1 FY 2024 results, and reiterating full year FY 2024 guidance.

Water Intelligence 10m Trading Update

Water Intelligence has reported a strong 10m Trading Update that indicates it is on track to meet expectations and we increase our FY23 estimates by +2%.

Norcros - UK margins up materially, South Africa stabilising

Norcros’s compelling investment case was underpinned at the half year where underlying operating profit was down less than 3% despite material revenue pressure. Group operating margins rose 60bp, the UK business reported record underlying profits and Norcros continued to take market share in both the UK and South Africa. We believe that Norcros’s key strengths are underappreciated and that legacy issues, notably the pension deficit, have been resolved. We retain our estimates and value the share

Morning Note – 5 December 2023

discoverIE - Efficiencies driving margin, good forward visibility

discoverIE has reported an encouraging H1 2024 showing a resilient sales performance (flat in total, +4% CER) against strong comparators (+23% CER last year) in a difficult macro environment and an impressive increase in operating margins from 11.5% to 12.9%. Underlying EPS increased +8% and gearing of 1.6x is at the lower end of the target range. There remains significant opportunity for acquisitions, which – alongside targeting continued margin increases – provides upside potential to our fore

Water Intelligence - 10-month update paints a strong picture, PTBA +14% YoY, inline for FY23E

WATR's 10-month update published this morning reflects continuing momentum in the business, in particular pushing margins ahead while also continuing to invest for growth. WATR is a supplier of in-demand water leak detection and related services across the whole of the US, with rarity / uniqueness in being a nationwide provider of these services, while also playing in international markets including the UK, Australia and Canada. The company has typically generated double-digit CAGR over the pa

Titon Holdings+ (TON, House Stock at 80p) - Trading update

SP Angel Morning View: Gold powers through $2,100/oz on outlook for Fed rate cuts

UK-Listed Energy Sector: Review of the UK oil and gas landscape – why the country needs it, current policy and tax

The front of this note takes a look at the UK oil and gas sector, why domestic production is advantageous, what the main political parties think, and what could happen going forward. The latter part contains a review of the companies in our coverage – some that are UK centric, which give exposure to the note’s wider theme, and others that are focused elsewhere.

Velocys - Recommended Offer at 0.25p

The recommended offer announced today for Velocys comes from a consortium consisting of Lightrock, Carbon Direct Capital, GenZero and Kibo Investments. At 0.25p this values Velocys at £4.1m on a fully diluted basis. Following the acquisition, the consortium will provide up to US$40m of funding to help Velocys achieve it’s medium-term growth plans as well as providing a £3.5m bridging loan until the acquisition is effective. We remain of the view that the offer is cheap relative to the long-term

TClarke - £1.1bn order book and delivery protection measures

TClarke has confirmed it is on track to deliver its three-year growth-plan target of £500m of revenues in 2023E (up from £426m in 2022). It detailed a 99% increase in the order book to £1.1bn alongside a further £1bn in opportunities. Reflecting the current challenges in the construction sector, management has made a number of strategic decisions to preserve the business’s strong market and financial position. These include changing some supply-chain partners mid-contract to protect project comp

PROGRESSIVE: Oxford Metrics: Technology, strategy and EPS enhancing

Oxford Metrics (OM) today announced the acquisition of Industrial Vision Systems Ltd (IVS) for £8.1m, funded from cash and 1m new shares. IVS operates in industrial applications of smart sensing, with machine learning technology for quality control in the manufacturing environment. The deal is immediately earnings enhancing and we are raising our forecasts for FY24. This is an exciting first M&A application of the funds from the Yotta disposal. The deal appears technologically and strategically

PROGRESSIVE: SDI Group: Acquisition of Peak Sensors

SDI Group has announced the acquisition of Peak Sensors, a UK manufacturer of temperature sensors, for an estimated £2.4m (£2.3m less cash). The initial cash consideration is £1.58m, with a further c.£0.82m payment due shortly after completion. The deal will be funded from SDI’s revolving credit facility. As at 30 September, SDI had c.£1.78m cash, £15.1m bank debt and £9.9m undrawn bank facility excluding the accordion, providing considerable financial flexibility for the group. The acquisition

Morning Note – 28 November 2023