Drax powers ahead on Morgan Stanley upgrade

Morgan Stanley has upgraded temporary power provider Drax to 'equalweight' from 'underweight' but trimmed the price target to 320p from 325p.

It noted the stock is down around 45% versus the sector year-to-date, and around 25% in absolute terms, mostly on the back of negative earnings revisions, negative sentiment towards UK utilities given regulatory and political risks and a lack of positive catalysts so far this year.

However, the bank said the focus is now shifting to next year and it is turning more constructive as key catalysts approach. It said 2018 EBITDA guidance at the full-year results in February should provide additional colour on underlying earnings power given the strategic overhaul. In addition, it pointed to management guidance on the 2018 dividend and clarity on additional capital returns at the H1 results next year.

MS also highlighted the next T-4 capacity market auction, where we will gain more visibility on potential gas plant investment and said there is a potential pellet plant purchase, but this will depend on market opportunities.

"Following a tough 2017, valuation looks fairer and with catalysts ahead, we move to equalweight." The bank reduced its price target on the stock due to higher coal costs, partly offset by higher power.

Morgan Stanley has 'overweight' ratings on both on SSE and National Grid and an 'underweight' rating on United Utilities.

"We like SSE's visible growth pipeline and see today as an attractive entry point despite heightened UK regulatory risks. We see good upside from National Grid as we expect it to turn around its US business and close the valuation gap to US peers."

At 1320 BST, Drax shares were up 1.4% to 286.60p.