The latest Investing Matters Podcast with Jean Roche, Co-Manager of Schroder UK Mid Cap Investment Trust has just been released. Listen here.
I cannot disagree here. However, current situation should rather be looked at as an opportunity to get some shares at ridiculously deflated prices. Drax's financial condition in not worse then when it traded @380p or so. It announced and is working out the new strategy with Ebitda already up over 50% this year. Yes, it has more depreciation charges and hedging losses but everyone who's not totally financially illiterate understands it. Higher Ebitda/earnings means healthy cash generation and that is what matters. Look at the institutions. They are not the ones selling. Hegding losses don't mean shit. It's a loss on a contract but gain on cheaper biomass purchases. That effect is usually not matching within a period but overall it's a null effect (unless there is an underhedge). Anyway, don't expect fools to know or understand this. If they knew what 'hedge' means they would not there are no 'losses' here.
The only remaining question is how quick all time lows of c. �2.07 per share will be broken. It's hard to believe Drax management was able to butcher share price even though they rake in close to �1billion subsidies each year.
I've made some research. During the last two years it's never been more than 5 losing sessions in a row. Now we have 2 weeks of daily losses, each a few percent drop. Started @ 290p and we're @ 230p (for now). It looks like an institution reducing its holdings. It's anybody's guess how low it may go.
Well, nothing specific then it seems. In such a case I can only repeat what I already said 2 months ago or so. There's no other way for this stock but to drop to all time lows anytime soon. No wonder with a guy at the helm who announces a new long term strategy only to issue an eleven hour profit warning and report EBITDA miss in a very first year of that strategy. Can it be any more lame and unprofessional?
I do believe it will report strong results and optimistic forecast for next year but it's still 2.5 months away. Judging by an uninterrupted fall since mid year I wouldn't be surprised if it drops further in the meantime.
It's very weak and no wonder. Drax is a serial underperformer. It's earliest chance to turn the tables comes in Feb when full year results are to be released. Nothwithstanding, I still think it will reach new all-time lows by end of January. Great opportunity to buy on the cheap.
It's a self propelling downward spiral at the moment. Stop losses are triggered and declines execerbated. Hedge funds (see yesterday) have a lot of opportunities out there and to fund their purchases they need cash. What they do is selling the worst underperformers (and that is Drax among others). That said and coupled with no positive triggers on the horizon (2017 results are only to be reported at the end of Feb) I think stock price can reach historic lows in Dec/Jan. Taking into account that the company is growing its earnings and will reach earnings levels it had at its best years within 2-3 years that is a great opportunity to accumulate shares (which are a whisker from being cheapest in history!) I'm not going to miss.
The U.K. government is seeking public comments on two proposed options aimed at controlling costs of NON-GRANDFATHERED biomass conversion and co-firing units under the Renewables Obligation. The U.K. Department for Business, Energy and Industrial Strategy opened the consultation Sept. 15. The two options proposed include a generator cap and a re-banding of support levels. The changes would apply beginning April 1, 2018, subject to the outcome of the consultation and Parliamentary approval.
I don't sincerely think so. Drax's CfD is a legal contract and it cannot be 'cut' Other 2 biomass units are grandfathered under RO scheme and similarly the level of subsidy given at accreditation date is to stay till end of the program. Although theoretically the government can fiddle with the mechanics of the scheme they would most probably do that for non-grandfathered coal to biomass conversions first. Surely, the institutional investors know that. The only ones that can sell on this basis is uninformed retail crowd.
Far from it in my opinion. There are too many idiots out there. I think it will go down towards 250p or lower. Not because of the underlying weakness of the company as it is in a great shape right now. There is a classic 'greater fool theory' at play here. They bought at the peak in January and those fools need to sell now at the very bottom for the full circle to close. That's always the same, no matter what exchange or stock we're talking about. Meanwhile, it's a great buying opportunity for people who actually know what they're doing and what they want to achieve. I'm accumlating Drax shares in packets of 5000 starting from 280p adding every time it drops 10p. Those are happy days as we can all feed of those idiots. Good night.
Actually the case with subsidies is pretty clear and there's hardly any uncertainty here. Both CfD and RO schemes are running out in 2027. They are not suddenly withdrawn before this date. CfD is a binding legal contract and although RO scheme may be theoretically tweaked in next budgets there is low probability for this taking government commitment to the decarbonization and security of supply concerns into account. All this articles reading that Drax is reaping 1bn of taxpayers are absurd. All renewables get subsidies: wind, solar, biomass, you name it. Drax gets a lot because it's generating a lot of electricity being the single site biggest producer in the UK. Actually on the per MWh basis is close to being the cheapest if not the cheapest.
You're right about the results. This company is vastly cash generative now after new strategy has been put in place. Loss is caused by change in depreciation policy on coal assets and derivative contracts and is 'a paper loss', completely irrelevant as divident policy is no longer dependent on net profits but is actually cash driven... No idea why any serious inwestor is fooled by those 'losses' Drax is entering into derivative contracts of huge amounts. Once some of them are subject to so called 'hedge accounting' where any changes in contract values are deferred in equity, not all of them qualify. Non-qualifying derivative contracts' value changes (due to move in exchange rates, etc.) are booked directly in profit in loss. Those losses on derivative contracts are just timing issues. So f.e if sterling appreciates (from post-Brexit lows) than the company has loss on derivative contracts but on the other hand it will pay much less for its biomass and register a lower cost of sale and higher gross margin. Catch is that can happen in different reporting period and that's why results are volatile.
Your intangibles/goodwill figure is from before Opus acquisition. It's 225M for intangibles and 170M for goodwill now. I agree this company has a lot of positive developments playing out now and is way too cheap but look at the stock price behaviour. It's a whisker from 2017 lows in April and I think it's not the end of the descent. It's one of the least loved company on the whole index. It was whacked by the regulators too many times and the perceived risk is still very high apparently. Similarly, for whatever reason investors still seem not to believe Drax story (or their inwestor relations suck big time)
The best what could happen under the new CEO is a takeover by a bigger player. At least some value would be released for the shareholders. Currently it's such a value trap. Going one way only and it is down. Trading over 30% below its book value. Once I thought it a good idea to buy and hold its stock. Now I really regret the decision. Holding this dog is like death by the thousands cuts.
Today there was a classic example of a herd behaviour of an uninformed retail masses. Although Drax reported a significant improvement of its results and cash position it was sent down at the beginning of the session with almost 10%! Retail crowd cannot be blamed indisciminately here however. First thing they could see in the morning was a note of an equally clueless journalist saying that Drax turned into losses of 80 million. What both aforementioned journalist and retail investors failed to grasp is the fact that this statutory loss hardly matters. Drax new dividend policy is not longer based on underlying earnings. It pays out 50 million per annum plus any access cash it has. Depreciation, amortization and unrealized losses on hedge contracts are only non cash accounting adjustments. They do not diminish shareholder returns or cash value of the company. Drax EBITDA increased with 50 milliion and driven operational cash increase of roughly the same amount. This is what matters for both dividends and long term shareholder value. Just wondering why some people are investing in shares of the companies which business and policies they have no clue about.