Broker snap: Drax remains a yield play

4th Aug 2010 11:18

Results from coal-fired power plant operator Drax provided little impetus for analysts to alter full-year forecasts, though Nomura Securities has trimmed its earnings per share estimate by 3%.The broker noted that the commodity outlook has changed little since it upgraded the stock to "neutral" in mid-June and things have not really moved on either in terms of Drax's plans to move to a greener platform through the conversion of one or more plants to using biomass."We suggest that Drax will only commit to dedicated new-build and/or conversion once the value proposition can be proved. Investors could hold the stock for yield in the intervening period," Nomura analyst John Musk suggests. The stock is yielding more than 4% based on historical payments or 7.8% on the projected pay out for the whole of 2010."With new 50% payout now effective and relatively secure EPS (fully hedged for 2010 and 70% for 2011), we see a yield of almost 15% over two years," Musk predicts.The company said regulatory uncertainty means development work for first dedicated biomass plant will continue into 2011 before investment case can be proven. Nomura expects Drax to "campaign hard for a framework that allows conversion of one unit (with others to follow) from coal to biomass and expect this to be value enhancing," though the enhanced valued is not included in the broker's base valuation of 425p per share.