RBC Capital upgrades Drax on recent acquisitions

RBC Capital Markets upgraded Drax to ‘sector perform’ from ‘underperform’ and lifted the price target to 320p from 280p.

The bank said the upgrade was mostly on the back of recent acquisitions that address its concerns around the time-limited nature of the core asset.

“We have previously stated that we see Drax as a limited life asset with earnings from the core generation asset very uncertain beyond the mid 2020s. However, last week Drax took a significant step in addressing this concern with two acquisitions that add a second lease of life to Drax and significantly change the duration of the investment case.”

Drax announced last week that it had conditionally agreed to buy Opus Energy for £340m and four open cycle gas turbine development projects for electricity generation.

RBC said it was now including around £40m of earnings before interest, taxes, depreciation and amortisation from 2017 onwards for Opus Energy, including the benefit of synergies and cost savings.

“We see the £340m acquisition as adding long term diversification and visibility in earnings and delivering a strong competitive position in UK energy supply markets,” it said.

At 0955 GMT, the shares were up 2.4% to 315.50p.