Drax powers higher on Goldman upgrade

Shares in power company Drax surged after Goldman Sachs upgraded the stock to ‘buy’ from ‘sell’.

It said the risk/reward was skewed to the upside following material underperformance, which it believes was due to declining gas and power prices in the UK.

GS pointed out that since it added the stock to its ‘sell’ list on 10 September, it’s down 17.2% versus the FTSE World Europe 0%.

“We also see valuation upside from potential M&A, which we include with a 15% weighting in our valuation,” it said.

Goldman said the key question for Drax is the European Commission’s decision on whether to approve a fixed price contract for difference (CfD) for Drax’s planned conversion of its third unit to burn biomass from coal, and if so, at what price.

GS said its forecasts and valuation assume the contract is approved at a price of £100/megawatt hour.

"We see positive read-across from the EC’s recent decision to approve a £105/megawatt hour price on a similar contract for RWE’s plant at Lynemouth. We expect a decision on the CfD from the EC in the next 12 months.”

GS has a 12-month price target of 260p on Drax.

At 0843 GMT, shares in the power company were up 9.6% to 232.40p.