Blackfriar: Two stalwarts in the region see their stock rising again

TWO Yorkshire veterans, Drax and Fenner, announced a strong recovery yesterday after several years that both companies would rather forget.

Once dubbed “Europe’s biggest polluter”, North Yorkshire power station Drax has accomplished a remarkable turnaround under chief executive Dorothy Thompson.

The station’s first environmentally friendly biomass unit has performed much better than initially hoped and the group has spent the last six months getting its head around the best way to make energy from sustainable wood pellets.

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It’s a far cry from the images of the power station belching out smoke over Yorkshire and making a major contribution to global warming. Yesterday Drax said full year earnings will be “materially ahead” of market forecasts following a better than expected performance from biomass.

The company has developed technical solutions to deliver output of up to 600MW from a biomass unit. Its recent data suggests this will be a long-term achievable goal.

The next stage for the firm is to convert its second unit in the second quarter of 2014 and there are plans for a third unit to be converted in 2017.

Depending on Government policy, Ms Thompson said Drax will convert all six to biomass, which would be a great achievement for a company that has the dubious reputation of being the UK’s single largest emitter of carbon dioxide.

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Ms Thompson said the Government has made “very clear and very appropriate policies” in relation to supporting biomass, raising hopes that the conversion of all six units could be a reality.

So is Drax a sure bet for punters? The shares closed up 2.6 per cent yesterday, a rise of 16.5p to 653p. Its generating capacity of 3,960 megawatts is the highest of any power station in Western Europe and it provides about seven per cent of the UK’s electricity supply, making it a vital player in the bid to keep the lights on in the UK.

But it’s probably not a stock for the faint-hearted as so much is reliant on Government incentives

Analysts at Deutsche Bank said Drax is a risky stock, although it appears poised for strong earnings growth as a result of a potential step up in UK gas prices over the next two years and the likelihood that coal prices will remain low.

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Add this to Drax’s steady conversion to biomass and Deutsche has a heady target price of 770p, assuming Drax converts half of its capacity to biomass by 2016.

So what are the key risks to Drax not hitting this target?

Namely lower gas prices, higher coal prices, higher biomass prices, continued oversupply of UK power markets and possible Government intervention to curtail biomass support.

Analyst Tina Cook, at Charles Stanley, said Drax’s share price is up 17 per cent so far this year.

“Drax remains a higher risk utility that is embarking on a project at the forefront of industry and earnings are still expected to decline in 2013 (a trough year) due to the rising cost of carbon and higher capex budget,” said Ms Cook.

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“However, given recent share price weakness and growing confidence in Drax’s ability to execute its transformational plans coupled with scope for positive catalysts in 2014 and market expectations of an attractive dividend policy once all units are converted, we upgrade our recommendation,” she added.

The other industry survivor is industrial conveyor belt maker Fenner, which reported a strong recovery in its second half as sentiment picks up among mining customers in Australia and the US.

The Hessle-based group’s expansion abroad has been one of its major strengths.

Its exposure to emerging markets and the commodities boom two years ago looked a nailed-on growth story.

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But then last year factors beyond its control hit the East Yorkshire-based firm’s share price.

First came the shale gas boom in the US, which knocked the price of coal and hit the engineering firm’s conveyor belting business.

Then growth in China and India began to slow. Its shares fell to 326.5p in July.

Fenner closed last year at 396.3p. Last night they closed up 10.5 per cent at 450p, one of the stock exchange’s biggest gainers.

Both Drax and Fenner are closely allied to the planet’s insatiable appetite for energy.

Blackfriar bets that both stocks will continue to swing upwards.