Drax loses power on Morgan Stanley downgrade
Power generation company Drax was under the cosh after Morgan Stanley downgraded its stance on the stock to 'underweight' from 'equalweight', saying there are more attractive opportunities elsewhere.
Drax Group
533.50p
16:39 03/05/24
Electricity
10,313.57
16:54 03/05/24
FTSE 250
20,164.54
17:00 03/05/24
FTSE 350
4,515.50
16:54 03/05/24
FTSE All-Share
4,469.09
17:14 03/05/24
MS said that although the company's transformation away from merchant generation is progressing and the acquisition of Opus Energy should breathe new life into it, Drax remains geared to commodity price moves.
The bank pointed out the stock is exposed to the UK power and gas price with around 15 terawatt-hours per annum of power price exposure.
MS said high operational leverage means a £5/Megawatt hour move in power impacts its discounted cash flow valuation by 20% and there is still a high correlation to the oil price.
It said the retail business has grown impressively over the last few years, but even there growth pales in comparison to a big commodity price move.
In addition, MS said that with management talk of further growth plans, it is hard to envisage a dividend upside surprise.
The bank sees better opportunities elsewhere in the UK and highlighted SSE as offering a lower risk and attractive yield.
MS upped its price target on Drax to 325p from 310p.
At 1140 GMT, the shares were down 3.4% to 335.20p.