Sunday share tips: Drax, Purplebricks
In The Sunday Times’ Inside the City column, John Collingridge looks at power generator Drax - owner of the Drax power station in North Yorkshire, which less-than-proudly bears the title of Britain’s biggest single source of carbon dioxide emissions.
Despite its carbon-chugging existence, the station has managed to survive the many axes that have fallen on its coal-fuelled peers, with Drax taking measures as early as 2004 when it converted half the plant to biomass in the form of wood chips.
That scheme’s greenness was questionable, Collingridge noted, given the woodchips are shipped all the way from Louisiana and Mississippi, although on a pure business basis it makes perfect sense, given the plant is underpinned by taxpayer subsidies for another decade.
And even with that life support, Drax - the company - still knows it needs to look ahead, especially after a government promise to end coal generation by 2025.
It has plans to convert the rest of Drax - the plant - to gas, build four small gas generating plants around the UK, and plonk the world’s largest battery next to its Yorkshire flagship.
Behind the gusto, Collingridge says, is chief executive Dorothy Thompson, who has been at the helm since the stock floated in 2005 and watched its shares bounce around with Westminster’s energy policy of the day.
Shares in Drax closed at 310.1p on Friday, putting the firm’s value at £1.3bn.
While Thompson’s big plans for more gas and a huge battery are indeed bold, Collingridge notes they are not without merit, given National Grid concerns that as true green energies - such as wind and solar - form a larger part of the UK’s generating ability, there needs to be something dependable for days when Britain’s wind and sunshine becomes less than dependable.
Drax says it wants to have seven gigawatts available at any time, ready to go at the push of a button - dependability the government will want to pay a premium for as coal and nuclear supplies are shuttered.
In true Thompson style, the chief executive also wants a 15-year guarantee from Westminster before the company presses on with the plann.
“This is gutsy stuff. As analysts at HSBC put it, Drax is not yet an income stock and its strategy is as yet unproven,” Collingridge says.
“Still, if anyone can do it, Thompson can.”
Over in the Mail on Sunday, Holly Black focusses on AIM-traded online property marketing platform Purplebricks, which promises a cheaper - but still guided - alternative to high street estate agents when it comes to selling residential property.
And it’s been the company’s marketing which has taken investors on a roller coaster in the last year, with the Advertising Standards Authority upholding a complaint against the firm on the clarity of the added cost of viewings in its advertising.
That came just two months after the industry self-regulator upheld complaints about claims Purplebricks made over potential savings, compared to high street estate agents, and less than a year after an earlier scolding from the ASA.
An investigation by BBC’s Watchdog consumer affairs programme hasn’t helped things for investors either, with shares reaching a peak of 514p on 8 August, dropping back to less than 390p last week.
Still, Black notes that shares in the company are worth three times what they were a year ago, which she puts down to the company’s market position of letting customers deal with a major transaction behind their touchscreens, rather than in a shiny high-street store.
Its point of difference is its flat fee, as opposed to the traditional percentage arrangement, although that is paid upfront, unless a customer chooses a more expensive pay-later option, which involves receiving a third-party line of credit.
It was the clarity of that more expensive credit option that attracted the ire of BBC’s Watchdog.
And while the flat fee doesn’t include some things which take an agent out of the office, such as viewings, it does include social media marketing and listings on the major real estate aggregators.
Additionally, despite the bumps in the road when it comes to the clarity of its marketing, its market share has soared, with it now said to hold almost three-quarters of the UK online market.
Now it has a major focus overseas, gaining first-mover advantage already in Australia and targeting the US, where it will use £50m recently raised to push into the already busy market.
Black says that, while Purplebricks won’t be unique in the US market, it is a busy market with 5.5 million property transactions each year, and high commissions of up to 6%.
“If Purplebricks can avoid further run-ins with the advertising regulator, then its share price should easily recover,” Black said.Ambitious expansion plans could mean losses in the short term but, if successful, should reap rewards in the future.”