Jefferies hikes Drax target by 25% after strong interim results

Jefferies has hiked its target price for power station operator Drax by 25% after a "confident" presentation from the firm in last week's interim results gave the market increased visibility over the future outlook.

"Drax presented a confident 1H24 update, bolstered by a new share buy back programme and dividend increase that has been taken very positively by the market," Jefferies said in a research report on Monday.

The broker has kept its 'buy' rating and lifted its target price from 600p to 750p after upgrading EBITDA forecasts for 2024 to 2028 by 4% on average.

Drax said that strong net zero ambitions of the new Labour government are positive for bioenergy with carbon capture and storage (or BECCS), while BECCS could see a surge in demand from powering AI data centres in the future.

"We increase our PT by 25% to 750p, arguing that we now see increased visibility on Drax's longer-term earnings power from non-biomass generation," Jefferies said.

The stock currently trades at an enterprise value-to-EBITDA ratio of just 3.4 – a 20% discount to its three-year average, the broker said.

The share price was down 0.4% at 642.68p by 1022 BST, after rising around 15% on Friday.