Drax
Shares in Drax (LSE: DRX) have risen more than 10% by morning trading, after the power producer reported an 18% rise in EBITDA to £120 million for the first half of 2015. This exceeded analysts’ expectations, as its share of biomass generation rose from 23% last year, to currently 37%. The increase use of biomass has reduced its UK carbon tax liability; and with the increase in carbon prices, the benefit to its bottom line is much more pronounced.
Its electricity supply business, Haven Energy, is also doing well, with revenues having increased 23% to £629 million in the first half. Drax also announced an increase in the interim dividend to 5.1 pence, from 4.7 pence last year.
The value of Drax shares are still 21% lower than a month earlier, following the removal of the Climate Change Levy exemption on renewable energy in this month’s budget. The move had been unexpected, and the investment justification of many renewable projects now look doubtful.
Without a U-turn in government policy, the investment case for buying Drax shares is unappealing. As biomass generation will no longer be exempt from the Climate Change Levy, EBITDA is still expected to fall by £30 million this year and £60 million in the following year.
Jardine Lloyd Thomson
Jardine Lloyd Thompson (LSE: JLT), Europe’s largest insurance broker, reported underlying EPS fell 10% to 30.2 pence in the first half of 2015. Revenue, which only grew 6% to £592 million, failed to offset the increase in operating costs attributed to the expansion of its US specialty business and the shift away from commissions-based employee benefits in the UK.
Because of one-off factors and growth investments, the drop in profitability in this year’s first half should only be temporary. Chief executive Dominic Burke remains confident that organic revenue growth will be in line with last year’s. “As we look forward, the business is well-positioned to deliver sustainable earnings growth”, he said.
Shares in Jardine Lloyd Thompson fell 1.7% to 998 pence.
Elementis
Elementis (LSE: ELM) reported a 9% decline in pre-tax profits, following the decline in sales to the oil and gas industry. Sales to the oil and gas sector fell 30% from a year ago, as drilling activity was considerably lower with lower oil prices. The specialty chemicals company is trying to diversify by increasing sales to paint and personal care manufacturers, but this will do little to slow the decline in earnings in the medium term.
Shares in Elementis have an attractive prospective dividend yield of 3.9%, but declining earnings and a pricey earnings multiple makes its shares unappealing. Analysts expect underlying EPS will fall 12% to 14.2 pence this year, which gives its shares a forward P/E of 17.9.
SEGRO
Industrial REIT SEGRO (LSE: SGRO) reported an 8.3% rise in net asset value (NAV) to 416 pence, in the first half of 2015. The limited supply in high quality industrial and logistic space in its European markets has helped to boost its property valuations. But, even with higher property prices, rental yields for industrial units are typically much higher than those for commercial and residential properties. Its portfolio of completed properties have an average yield of 6.3%.
The REIT should stand to benefit from its large speculative development pipeline, because development projects typically offer much higher rental yields. Although there is a risk of higher vacancy rates, the average projected rental yield on development costs for its development properties is 8.8%.
SEGRO is currently trading at a 6% NAV premium, but the combination of high yielding developments and further potential for substantial valuation gains means its premium is well deserved.
