Jefferies downgrades Drax to 'hold'
Analysts at Jefferies downgraded Drax from 'buy' to 'hold' on Tuesday, stating it was "unconvinced" the recent gains in the electrical power generation outfit's share price would continue.
Drax Group
490.20p
17:05 19/04/24
Electricity
9,964.26
17:10 19/04/24
FTSE 250
19,391.30
17:09 19/04/24
FTSE 350
4,341.08
17:09 19/04/24
FTSE All-Share
4,296.41
17:08 19/04/24
Although Jefferies noted that Drax's recently announced acquisition of 2.6GW of Scottish Power's hydro and gas power plants would be "highly EPS accretive and diversify the business", the broker also saw integration risks and now expects earnings of new assets to step down in 2022.
The broker said it felt the £702m deal should help Drax become a major provider of dispatchable power but felt the deal didn't appear to be "an obvious bargain" compared with valuations of listed generators and transaction multiples.
While Drax expects an EBITDA of £90-110m from its new assets in 2019, the broker thinks earnings will fall in 2022 as capacity market revenues fall by 50%.
Jefferies also noted that earnings from new assets would likely come under pressure from growing competition in the system support market.
Looking forward, the broker stated the benefits of future EU policy reforms seemed to be largely priced-in and also highlighted the recent UK budget as being another potential downside risk to Britain's carbon levy of £18 per tonne after March 2021.
Jefferies kept its 400p target price on Drax unchanged.