Exane downgrades Drax to 'neutral'

Exane BNP Paribas downgraded Drax to ‘neutral’ from ‘outperform’ following a strong share price performance.

The bank noted the stock has performed strongly over the past three months and particularly since the Brexit vote. The shares dropped 11% in the first two trading days after the vote but have rebounded 20% since then, slightly outperforming the broad utilities sector.

It also pointed out that consensus momentum is turning negative.

“There is considerable uncertainty around a number of key issues affecting the stock – the CfD approval timing and result, the UK government’s forthcoming consultation on coal and its attitude to supporting further biomass conversions,” Exane said.

It argued that it needed some clarity on the outlook for these issues before it could become more positive on the stock, adding that it sees more attractive risk-return elsewhere within the sector.

As far as the first-half results are concerned, it said the numbers were line at the EBITA level but FX gains on the interest line put them modestly ahead of expectations at the pre-tax profit and earnings level.

On Tuesday, Drax reported a drop in underlying earnings for the first half of the year amid weak commodity markets and following the removal of the climate change levy exemption.

In the six months ended 30 June, underlying earnings came in at £17m from £41m in the first half of last year, while earnings before interest, taxes, depreciation and amortisation slumped to £70m from £120m.

Exane has a 340p price target on the stock.

At 1000 BST, Drax shares were down 1.6% to 341.50p.