Greater clarity from the UK Government on funding for carbon capture and storage (CCS) is welcome for Drax. We expect the deployment of CCS to allow the company to continue operating its biomass units profitably beyond 2027 when current support mechanisms end. This initial guidance for simple CCS suggests that CCS costs can be covered and a marginal positive valuation impact from running ahead of unabated plant is possible. However by delivering biomass and CCS (BECCS), Drax offers a fully negative emissions solution. We expect stronger support for this, potentially allowing baseload running. Drax remains one of the very few opportunities for investors in negative emission solutions.
Companies: Drax Group plc
The sale of Drax’s portfolio of combined cycle gas turbines (CCGTs) removes some revenue in the near term but the ability to reinvest the proceeds in the pellet business should replace this quite quickly in our view. While the loss of near term income has an impact on valuation this should be offset by a better long term future in the pellet business. As a result our base case valuation increases from to 515p from 505p.
Drax has made further progress on debt financing, refinancing its revolving credit facility, drawing on its previously announced infrastructure facility and using its recent bond issue to redeem earlier loans. While much of this is tidying up, it provides efficient longer-term financing visibility at a time when the company has strong investment opportunities notably in biomass supply. The group cost of debt is now well below 4% at c.3.7%.
Historically exposed to coal, Drax had to adapt to ecological constraints. Which we believe it has failed to do. We have therefore decided to terminate our coverage in order to allocate our resources to companies that are in tune with tomorrow’s challenges.
Drax has announced additional loan facilities which will reduce its all-in cost of borrowing to below 4% and we see this as helping to give Drax the firepower to expand its US-based biomass feedstock business efficiently. We see this business as having growing importance as several governments look towards biomass carbon capture and storage as a key component of the net zero tool kit.
Drax is a major enabler of the energy transition. It is the only UK investment opportunity of scale that can offer exposure to BECCS, long duration storage and low carbon spinning reserve, all essential to deliver what is now a legal requirement for net zero emissions by 2050. We initiate coverage with a central case valuation of 505p.
Drax reported a set of FY19 results which were in line with expectations. EBITDA increased by +64% to £410m and EPS tripled to 29.9p (5% higher than the consensus at 28.4p). The proposed dividend is in line with expectations (15.9p). The main contributor to this growth was the Production division (+52% in H2) on the back of a slight positive volume effect (pellet production was up by 4%) and a reduction in the costs of production by 3%.
Government bans on new fossil fueled vehicles in many major economies are likely to drive significant growth in electric vehicles (“EVs”) over the next twenty years. This will create growth in electricity demand from EV charging. The volume of energy to be supplied creates opportunities for both supply companies and generators and the provision of charge points is already creating a new industry. However, the timing of this demand puts pressure on local distribution infrastructure. While smart charging and vehicle to grid technology offer solutions, we believe these will only be partial given likely charging behaviour and as a result there will be demand for additional grid capacity and for other solutions. These other solutions include charger located storage and distributed generation.
Companies: CNA NG/ YU/ DRX GOOD SMS IKA
The group published reassuring H1 figures with an encouraging Generation division and negative elements that should fade over time. Full-year EBITDA and net debt guidance remain unchanged, in the plausible scenario of a re-establishment of the Capacity Market in H2.
Drax reported a set of FY18 results broadly in line with estimates (<1% short). The group posted a 9% growth in adjusted EBITDA, translating the continued ramp-up of the wood pellet business as well as a resilient market share in the B2B supply division, which helped to offset an outage in Q1-18 and higher coal/carbon prices in the UK.
Drax released a mixed set of H1 results, marked by two unplanned outages in the generation business, partly offset by the positive performance of the US pellet and B2B supply divisions. The group confirmed its FY targets and expects to pay a £56m FY18 dividend.
• All divisions achieved improved earnings, finishing on the positive side.
• Substantial EBITDA improvement supports OCF and net debt levels above expectations.
• A £50m dividend payment (12.3p/share). Positive £50m share buy-back surprise.
The group published its half-year results showing a strong top-line as revenues increased by 21% to £1,800m and EBITDA rose 70% yoy to £120.8m, which was within expectations. However, higher depreciation expenses, losses on derivative contracts and a doubling of interest expenses have pushed the group to a net loss of £-16.8m. On an adjusted basis, net income fell by 47.3% to £8.9m, translating into an EPS of 2.2p/share which is below expectations.
The group maintained its full-year guidance for EBITDA to achieve £240m (already 50% achieved), although no information was given at the net income level, so that the market’s expectations of £42.2m seems difficult to be attained.
The group proposed an interim dividend payment of £20m, which represents 40% of the expected £50m full-year payment, translating into 4.9p/share and a payout ratio of 222% on adjusted net income.
Drax has published its FY16 results which are weak at the top-line level with revenues reaching £2.95bn (-4.7% yoy) and EBITDA reaching £140m, which is 2% below market expectations and represents -17.2% yoy mainly due to the removal of the renewable subsidies in the UK and lower power prices. However, a strong performance in the trading business and £177m of unrealised gains from derivative contracts have boosted the reported net income profit of the company to £194m, representing a 246% yoy increase. On an adjusted level, the profit of the group was £21m representing a 54.3% yoy contraction and an EPS of 5p, which is broadly in line with expectations, but below ours.
Net debt decreased by 50.2% yoy to £93m, ahead of forecasts, due to a strong cash flow performance (+29% yoy from operating activities) and an increase in cash reserves due to a £86m positive free cash flow.
The group has proposed a dividend payment of 2.5p per share (-56% yoy), which is at the consensus level and represents a 50% payout ratio. It expects a 2017 EBITDA in line with market expectations at £229m.
The company has decided to put the current dividend policy under review (50% payout ratio). No information is expected before H1 17 after consulting the shareholders.
Drax has published today its trading update in which it states that it expects earnings to be at the lower end of its guidance (£135-169m). It also includes the approval of the CfD contract for the third biomass unit by January 2017 with a strike price of £100/MW.
In addition, the group has provided a strategic update in which it mentions that it has completed two separate transactions, the first one being Opus Energy, a retail provider for the UK market with over 256k customers, for £340m, translating into a 10x EBITDA price. This would allow Drax to be within the top 7 suppliers in the UK (within the “big 6”).
The second acquisition is the purchase of four Open Cycle Gas Turbine (OCGT) plant projects with a total capacity of 1,200MW for only £18.5m, translating into a price of £14.5k/MW. These projects will be developed if they are backed by 15-year Capacity Market contracts.
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Although 2020 will probably go down in history as one of the most challenging years experienced during our lifetime, it will also likely be chronicled as one of the best years for the recognition and appreciation of science. As we entered 2020, the COVID-19 pandemic was in its infancy. However, it rapidly evolved through the exponential rise in infections and mortality globally. Much has been achieved during the past 12 months in the fight against COVID-19, but, as we enter 2021, there are considerable concerns about the emergence of a mutant version of the virus and the second wave that we are now facing.
Companies: AVO ARBB ARIX BBGI CLIG DNL FLTA ICGT OCI PCA PIN PHP RECI STX SCE TRX SHED VTA YEW
Capital Limited has released its Q4 and FY2020 trading statement this morning. Overall it shows 2020 was a strong year for the company with revenue growing 18% and most other operating metrics growing positively with it – see Fig 1. We have adjusted our forecasts accordingly and also to take into account the mining services contract for the Sukari Mine which the company won late last year. The latter is a game changer for Capital and its investment case in our view; turbo charging revenue growth, enhancing margins and diversifying cashflow all of which should lead to materially higher valuation multiples. We raise our PT to 127p.
Companies: Capital Limited
2020 ended with two positive moves for carbon capture and storage (CCS) which should benefit Velocys clients. In the US, the signing of the COVID 19 stimulus bill extends and adds support for CCS in the US where the Bayou project is working with CO2 offtaker Occidental to deliver a negative emissions project. The UK government has also published guidance on CCS funding making this option an additional opportunity for the Altalto project. Velocys remains one of the very few opportunities for investors to play negative emission technology. We see both these moves improving the operating environment for the company’s clients and their projects, stimulating demand for the Velocys technology.
Companies: Velocys plc
XP reported a strong finish to 2020, with Q4 revenues up 24% y-o-y and 4% ahead of our forecast, driving FY20 profitability ahead of expectations. Order intake has normalised to pre-COVID-19 levels, reflecting continued strong demand from the semiconductor sector. We have revised our estimates to reflect strong Q420 performance and the weaker dollar, driving a 3.0% increase in FY20 EPS and a 2.3% cut to our FY21 EPS.
Companies: XP Power Ltd.
Avingtrans has announced that it has continued to perform well in H1 FY2021 and is trading in line with market expectations. Our cautiously framed forecasts anticipate adjusted EPS growth of 17% in FY2021E and 10% in FY2022E, including the benefit of cost reduction measures. The Group confirmed high levels of order cover for FY2021E at 85% at the end of September and orders taken since then will have provided further comfort. The shares have given ground YTD and now trade on a forward EV/sales multiple of 0.9x and prospective PERs of 13.8x and 12.7x for FY2021E and FY2022E respectively which are well below sector metrics. Management is also making great progress within the medical division where the potential for its small scale MRI is substantial.
Companies: Avingtrans plc
Like many awful dreams, the Covid19 nightmare hasn’t quite finished, recently mutating into an ultracontagious super-bug. The risk being global transmission and infection rates spiral out of control, swamping healthcare systems again. However this time there is an answer. Hunker down for a few months, and inoculate as many vulnerable people as possible to reduce fatalities/hospitalisations. Plus, the Oxford/AstraZeneca vaccine is relatively simple to distribute (re 2°C to 8°C). Making rapid nationwide rollouts feasible, alongside ultimately bringing the curtain down on this dreadful virus.
Companies: Mpac Group PLC
Initiating with a Buy rating. We initiate our coverage of Proton Motor Power Systems (“Proton Motor”) with a BUY rating and a target price of 201p. Our valuation equates to a market capitalisation of £1.47bn, compared to a current share price of 65.5p and a market cap of £479m.
Companies: Proton Motor Power Systems Plc
Seeing Machines has announced that it has licensed its Occula® Neural Processing Unit to OmniVision Technologies Inc. This advances the relationship from the MOU announced in September 2020 and builds on a relationship that is over five years old, with the two organisations having worked on multiple automotive programmes with a number of Tier 1 customers.
Companies: Seeing Machines Limited
Directa Plus has released a trading update guiding to revenue for FY20 of approximately €6.5m. This is 9% ahead of the €6.0m in the trading update from 3 December and 18% ahead of our expectations of €5.5m which were set on 24 September 2020. The strong trading performance has been primarily driven by the sales of G+ enhanced face masks, including Co-Masks, and the strengthening performance of Setcar in the Environmental Division.
Companies: Directa Plus Plc
A £10m fundraising expedites the Protos project and opens the way for the £10.2m Peel warrant exercise in the current year. The funding will also give the company additional resources to pursue international opportunities. Adjusting for the raise and some timing differences, our UK only base valuation rises from 5.0p to the raise price of 5.5p and we see existing international opportunities taking this to 7.5p (from 6.9p) and including opportunities in Europe this could rise to 12.1p (from 11.2p).
Companies: Powerhouse Energy Group PLC
AFC Energy (AFC) – Corporate – Strategic Partnership with Ricardo
Companies: AFC Energy plc
Volex has reported interim results that are in-line with expectations following a strong trading update in mid-October. Of far greater significance is today’s announcement of the proposed acquisition of DEKA for a consideration of up to €61.8m on a debt free basis. DEKA is a leading and highly profitable power cord manufacturer, strategically located in Turkey, that serves leading European white goods manufacturers. The acquisition should close in early CY2021, subject to expected Turkish Competition Authority approval. We foresee 15% earnings enhancement in FY2022E with further opportunities for revenue synergies with Volex in the Far East as its operations also vertically integrate, production efficiencies increase and the cost of production falls. The statement highlights that pro forma net debt/EBITDA remains under 0.4x and this provides scope for further bolt-on acquisitions alongside a new $70m RCF and $30m accordion, also announced with the interims.
Companies: Volex plc
Directa Plus has released a positive trading update, prompting an increase in FY20 revenue forecasts after a strong conclusion to the year. The outperformance has come from Setcar and, again, from better than expected sales of G+ enhanced face masks (one of the drivers of revenue upgrades in early December). The Group enters FY21 with momentum and, in our view, attractive medium term growth potential, having responded very well to the challenges of the COVID pandemic.
Further media reports that Dr Martens, the British Boot brand is planning an IPO on the LSE. It is currently owned by PE group, Permira who is expected to sell down its stake at the IPO. March 2020 YE the group had revenues of £672m and EBITDA of £184m. Deal size TBC. Upon Admission to AIM, Nightcap will acquire The London Cocktail Club Limited (the "London Cocktail Club"), which is an award winning independent operator of ten individually themed cocktail bars in nine London locations and one location in Bristol. Offer TBC Due mid Jan. HSS Hire Group, HSS.L transfer from Main to Aim. Mkt Cap c. £70m. Recently raised £52.6m. Leading supplier of tool and equipment for hire in the United Kingdom and Ireland and has provided equipment hire services in the United Kingdom for more than 60 years, primarily focusing on the B2B market. Due 14 Jan. VH Global Sustainable Energy Opportunities plc, a closed-ended investment Company focused on making sustainable energy infrastructure investments, today announces intends to launch an initial public offering of shares on the Official List (Premium) of the Main Market of the London Stock Exchange. Due by Early Feb.
Companies: IUG CBP KAT APP RST DIS NICL BOKU CNIC HE1
AFC Energy has announced a strategic engineering collaboration with Ricardo (RCDO). It will focus on global opportunities for AFC’s fuel cell technology in marine, rail and stationary power sectors. The agreement should open sizeable new markets for AFC which are not yet reflected in our long-term projections or the market capitalisation. Our valuation is under review for a significant upgrade given recent positive developments.