JP Morgan cuts Drax target price but says shares are 'oversold'

Analysts at JP Morgan reiterated their 'overweight' stance on shares of Drax, telling clients that markets were apparently discounting too steep a drop in wholesale electricity power prices and overlooking the company's resilience in the face of the Covid-19 pandemic.

The shares had fallen by 33% year-to-date on the back of a £10/MWh drop in wholesale electricity prices.

But at their current valuation, the shares were factoring-in a further 30% or £15/MWh decline in prices, JP Morgan said.

"While not impossible, we do not currently consider it a reasonable base case," the analysts argued.

They also pointed to the company's most recent trading statement and how it had found opportunities in ancilliary services.

That was a testament to Drax's resilience and would help to partially offset power price and retail weakness.

Nevertheless, JP Morgan did mark down its target price for the shares from 400.0p to 360.0p.

"With the shares now deeply discounted vs our conservative base case, we remain Overweight."

The shares had fallen by 33% year-to-date on the back of a £10/MWh drop in wholesale electricity prices.

But at their current valuation, the shares were factoring-in a further 30% or £15/MWh decline in prices, JP Morgan said.

"While not impossible, we do not currently consider it a reasonable base case," the analysts argued.

They also pointed to the company's most recent trading statement and how it had found opportunities in ancilliary services.

That was a testament to Drax's resilience and would help to partially offset power price and retail weakness.

Nevertheless, JP Morgan did mark down its target price for the shares from 400.0p to 360.0p.

"With the shares now deeply discounted vs our conservative base case, we remain Overweight."