LONDON (SHARECAST) - Analysts at Credit Suisse have today taken the decision to upwardly revise their price target and recommendation (to Neutral from Underperform) on shares of power station operator Drax. That as a result of updated estimates for biomass costs and biomass output trajectory, although they add that they still prefer SSE (Outperform, TP 1,450p) as a play on power prices in the UK.
Thus, they point out that on their estimates the £700m of capital expenditures which the company will undertake to convert half its units to biomass merely offsets the negative impact from the loss of free CO2 emissions permits and the CO2 floor price.
For that reason, they do not see a near-term EBITDA 'step-up.'
Interestingly, they also call attention to how the company´s dynamics, going forward, will change, with biomass costs and net thermal efficiency becoming the important profit drivers (rather than fossil fuel prices).
In last place, they highlight that there are a number of upcoming consultations, the key of which is the Government's cost control mechanism for biomass. Further possible catalysts are an expected refinancing and possibly a small equity issue. “For us, scarcity pricing on tight reserve margins mid-decade is the key potential positive,” they conclude.