Credit Suisse eyes dividend increase at Drax, ups target

Analysts at Credit Suisse upped their target price on shares of Drax because of higher near-term pricing in energy markets and the possibility that the European Commission might soon hand down a ruling on the state aid offered to the company to help it transform its coal-fired generators at the power station in Derby.

Drax was the clearest beneficiary of the scarcity which UK power markets were pricing in over the next five months, Credit Suisse said.

As a result, analyst Mark Freshney raised his 2016 and 2017 estimates for the firm's earnings before interest, taxes, depreciation and amortisation by 10% and 13%, respectively.

In turn, those revisions boosted his target price for the company's shares from 415p to 425p.

Furthermore, Drax's gas hedges brought increased value, Freshney said, and upside risks existed for the two capacity auctions scheduled to begin on 6 December 2016 and 31 January 2017, the analyst said.

Nevertheless, EC approval of the state aid was key and worth about 111p per share.

It had been 286 days since the European regulator had kicked off its investigation, and the two precedents, EDF's Hinkley point and RWE's Lynemouth, received approval after 294 and 285 days each one, he pointed out.

Credit Suisse expected Drax to announce a new dividend policy and an investor day following any ruling.

The company's shares were trading on about 6.8 times Credit Suisse's estimates for its EV/EBITDA in 2017 - assuming a £100m/MWh CfD.

If Drax did not get a CfD then its stock would be trading on an EV/EBITDA multiple of 11.0.

As of 1425 BST, shares in the firm were advancing 4.50% to 325.30p.