Tuesday tips round-up: Drax, Petra Diamonds

1st Aug 2012 06:58

Directors of Drax say that all the technical issues involved in converting half its capacity to burn biomass such as waste wood and woodchip have been resolved and the process can go ahead, now that the Government has settled the level of subsidy that the business can expect. Some in the market plainly have their doubts. There are still issues, in particular finding enough biomass to feed those higher needs. Drax will have to build plants in the United States to produce pellets, which are cheaper to transport. There are questions over the cost of scrubbing out emissions of nitrogen oxide. Future earnings, which will have to fund some of the investment, are hard to predict; halfway pre-tax profits fell from £169m to £141m because Drax sells most of its power forward and earnings from this reflect an earlier, less favourable environment for coal-fired producers. The dividend goes up and down in line with these lumpy earnings, a 14.4p interim payment this time, as against 16p last. Then there is the question of how much bid premium there is in the shares. Drax is seen as a target and the ending of uncertainty should make it more attractive. But it hasn't happened yet. A difficult investment to value; only for investors prepared for speculative risk, The Times´ Tempus column says. Operationally, management at Petra Diamonds are delivering - but the economic background remains tough. Problems in the Eurozone hit diamond prices last year - and the same pattern has repeated this year. Europe is not a major market for diamond sales, with the US and Asia being the main drivers. However, global sentiment has been subdued as there appears to be no end in sight for the crisis. Rough diamond prices fell from July to December 2011 before a temporary recovery in the first three months of 2012. However, prices have weakened again and Petra said it expects the rough market to remain under pressure. "However, Petra's view is that the medium to long-term outlook for diamond prices remains positive due to the well reported supply/demand fundamentals," it added. Named as a tip of the year in January, the shares are up 8%, compared with a FTSE 100 up 2%. Trading on a 2013 earnings multiple of 10 times, Questor maintains a buy rating.Please note: Digital Look provides a round-up of news, tips and information that is impacting share prices and the market. Digital Look cannot take any responsibility for information provided by third parties. This is for your general information only as not intended to be relied upon by users in making an investment decision or any other decision. Please obtain a copy of the relevant publication and carry out your own research before considering acting on any of this information.AB