Drax surges on Barclays upgrade to 'overweight'

Drax surged on Friday as Barclays upgraded the stock to ‘overweight’ from ‘equalweight’ and lifted the price target to 410p from 400p saying post-results weakness was unjustified.

It noted the shares have dropped 20% since the mid-February results, underperforming the Stoxx Europe 600 utilities index by 24%, seemingly “on little more than disappointment that Drax didn’t immediately announce a new higher dividend policy”, but instead said it would consult with shareholders over 1H17.

“We understand Drax’s consultation is a genuine attempt to balance priorities of growth capex and increased returns to shareholders. We thus see no justification for the scale of Drax’s recent share price reversion, and upgrade,” the bank said.

In addition, Barclays argued that post-results regulatory changes and acquisitions are positives.

It said that since Drax’s results, UK power prices are broadly unchanged - down slightly over the highly-hedged near term and largely flat from Winter 2018/19, with sterling-denominated coal prices down 4.5%.

“There have been two main developments, both of which are positive: 1) Ofgem announced proposed changes for embedded benefits - likely resulting in higher capacity payments for Drax’s coal operations and open cycle gas turbine projects; and 2) Drax’s acquisition of US biomass pellet plant capacity at 3.25x EV/EBITDA, which we see as earnings/valuation-accretive.”

At 0840 BST, Drax shares were up 7.6% to 326.90p.