JPMorgan cuts Drax price target

JPMorgan Cazenove cut its price target on Drax on Thursday to 740p from 830p as it lowered its valuation for the stock.

JPM noted that since the middle of August, the shares are down 27% as investors have become more concerned about the company’s use of working capital management tools, including receivables factoring. "We believe that this reaction is overdone," it said.

"We acknowledge that we previously underestimated the company’s use of these tools, which has increased, particularly in 2022, and we agree that the cost of using these tools has increased (as has the cost of financing in virtually all markets).

"Still, we believe that the market is being too harsh in the way it values the use of these facilities, particularly as it relates to factoring receivables. We have lowered our Drax valuation, incorporating what we see as a conservative valuation adjustment for Drax’s use of working capital management, as well as our view of conservative assumptions around profitability and value creation."

The bank now includes a £171m (44p) adjustment in its valuation for Drax’s use of receivables factoring, which it said is conservative yet still below the £400m+ it believes bearish investors view as the right figure.

JPM maintained its ‘overweight’ rating on the shares.