As shares soar 20%, will today’s deal finally help Drax Group plc return to growth?

Shares in Drax Group plc (LON: DRX) are heading higher today but should investors buy into the growth story?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

 Shares in Drax (LSE: DRX) are up by as much as a fifth today after the floundering energy company announced a game-changing acquisition to boost its growth. 

Drax has long been looking for potential acquisitions in the clean energy sector to drive revenue and profit growth as income from its legacy power generation business stagnates.

And today’s announced acquisition of Opus Energy appears to meet all of the group’s stated acquisition objectives. Opus is the UK’s sixth biggest business energy supplier, supplying electricity and gas to over 260,000 UK locations, helping Drax diversify from the power production market into the power supply market. What’s more, alongside the deal Drax is acquiring four Open Cycle Gas Turbine (OCGT) development projects with a total capacity of 1,200MW for an initial purchase price of £18.5m. In total, these two acquisitions will cost Drax a total of £368.5m upfront with further payments expected for the gas turbine projects following capacity market auctions.

Despite the high cost, these deals do look to be astute purchases by Drax’s management and should help re-ignite group growth. 

Attractive acquisitions 

Drax has been struggling with growth for some time and has warned on profits several times in the past few years. The company’s biggest problem is that it’s essentially just one power station, which means earnings are highly susceptible to any one-off issues. 

The Drax Power Station is located near Selby, North Yorkshire and is run on wood pellets that are produced around the world. In addition to the power station, Drax also owns Drax Biomass Inc (a wood pellet producer), Haven Power (an electricity supplier) and Billington Bioenergy (a UK wood pellet supplier). Haven Power was Drax’s first venture into the power supply market but compared to Opus the business is struggling. 

Last year, Haven reported a gross profit of £19m on revenue of £1.3bn. Meanwhile, Opus reported gross profits of £107m on revenue of £573m.  

Profit boost 

Looking at the figures, it’s evident how transformational this deal will be for the group. Drax posted a 42% decline in year-on-year in earnings before interest tax depreciation and amortisation for the first half of 2016. Analysts expect EBITDA to be 20% lower than the £169m reported for 2015, that was itself down from £229.4m for 2014. So excluding any cost synergies from the acquisition of Opus, next year Drax could be set to report a massive uplift in post-tax profits as income from the purchase blends with revenue from the rest of the group. 

Analysts have pencilled-in a pre-tax profit of £24m for Drax for full-year 2016. Add in an estimated contribution from Opus of £107m for the following year, and it’s clear why the shares have rallied by nearly a fifth in early trading today. The current valuation of 52.8 times forward earnings doesn’t seem so daunting when you consider this projected growth. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

Just released: our top 3 small-cap stocks to consider buying in October [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Investing Articles

How I’d use an empty Stocks and Shares ISA to aim for a £1,000 monthly passive income

Here's how using a Stocks and Shares ISA really could help those of us who plan to invest for an…

Read more »

Investing Articles

This FTSE stock is up 20% and set for its best day ever! Time to buy?

This Fool takes a look at the half-year results from Burberry (LON:BRBY) to see if the struggling FTSE stock might…

Read more »

Investing Articles

This latest FTSE 100 dip could be an unmissable opportunity to pick up cut-price stocks

The FTSE 100 has pulled back with the government’s policy choices creating some negative sentiment. But this gives us a…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

As the WH Smith share price falls 4% on annual results, is it still worth considering?

WH Smith took a hit after this morning’s results left shareholders unimpressed. With the share price down 4%, Mark Hartley…

Read more »

Investing Articles

The Aviva share price just jumped 4.5% but still yields 7.02%! Time to buy?

A positive set of results has put fresh life into the Aviva share price. Harvey Jones says it offers bags…

Read more »

Investing Articles

Can a €500m buyback kickstart the Vodafone share price?

The Vodafone share price has been a loser for investors in recent years, and the dividend has been cut. We…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Growth Shares

3 mistakes I now avoid when choosing which growth stocks to buy

Jon Smith runs through some of the lessons he's learnt the hard way over the years about what to look…

Read more »