JPMorgan rates Drax at 'overweight'

JPMorgan Cazenove has moved to an ‘overweight’ rating on Drax, which was previously not rated, and rated at ‘neutral’ before that.

It said a new strategy, the acquisition of Opus Energy, and State aid approval for its biomass CfD by the European Commission put Drax on a path to a more sustainable, predictable and profitable future.

JPM said that according to its analysis, the recently-approved acquisition of Opus Energy is accretive to earnings and valuation and refreshing its estimates gives rise to earnings per share upgrades of around 30% on average from 2017.

“In particular, putting to rest the debate over Drax’s strategic direction breathes new life into a company which has borne the brunt of UK decarbonisation policy in recent years.

“Following a period of restriction, we are moving to an overweight recommendation and December 2017 price target of 420p from Not Rated (Neutral and Jun-17 price target of 370p prior to restriction), based on our expectations that the stock re-rates as the company shifts its focus from its biomass conversion programme to an integrated customer growth strategy.”

In addition, JPM said that with earnings and free cash flow on a much firmer footing, it sees diminished risk of balance sheet stress despite the increase in net debt arising from the Opus transaction.

At 0950 GMT, Drax shares were up 2.2% to 383.40p.