Drax boosted by HSBC upgrade

Drax got a boost on Friday as HSBC upgraded the stock to ‘hold’ from ‘reduce’ with an unchanged price target of 315p following weakness in the shares after the first-half results.

The bank pointed out that Drax has underperformed the market after its first-half results.

“The company mentioned that its FY 2016 EBITDA will come in at the bottom of the consensus range, which in our view has resulted in the share price weakness.”

HSBC noted the share price has fallen around 8% in absolute terms in the last month, whereas the sector index – MSCI Europe utilities – remained relatively flat over that period. As a result, the stock is now trading in line with its price target, which implies 1% upside.

HSBC highlighted the short-term opportunity from auxiliary services.

“The short-term strategy is for Drax to offer services to National Grid as it seeks to balance intermittent and distributed power availability. National Grid suggested that these services could amount to £2bn by 2020.”

The bank said there are a wide range of services such as balancing reserve, reactive power and black start capability, that Drax could offer.

“With 10.5GW (nearly 20% of UK-installed capacity) of solar on the system and 20% of power provided by renewables in 2015 in the UK, these services will be increasingly required.”

HSBC said this was a considerable opportunity for Drax, which has capacity to service around 7-8% of the UK’s power demand.

At 0830 BST, Drax shares were up 2.9% to 323.40p.