Barclays downgrades Drax but eyes new dividend policy

In what was a largely very positive note, Barclays downgraded Drax Group after a 75% share price rally over the last year as the coal power station's plans to strengthen and extend earnings "lack clarity".

Final European Union state-aid approval for Drax’s biomass CFD subsidy has eradicated a previous risk discount and combined with an improvement in biomass generation economics and the value-accretive acquisition of SME retailer Opus Energy add up to the "fully justified" strong share price performance.

Drax's future earnings have been endowed with less volatility and higher confidence as the above moves lower exposure to volatile wholesale energy markets.

Opus also vitally gives Drax a visible material earnings stream beyond 2027 when biomass subsidies end, especially if the company can also proceed with new open cycle gas turbine developments.

Further optimism is taken from full year results due on 16 February, which "could herald a new dividend policy".

Based on the above, plus potential additional positive catalysts such as OCGT confirmation, further improvement in generation economics and pellet plant acquisitions, Barclays increased its price target to 400p from 325p.

However, analysts downgraded to 'equal weight' from 'overweight' as "the timing, quantum and probability of such upside opportunities [are] currently opaque".