Deutsche Bank downgrades Drax to sell on 'power price crunch'

The investment bank said on Tuesday that capacity concerns have been in the spotlight, with National Grid's notice of insufficient system margin (NISM) signalling a tightening UK power market.

However the pressure on Drax's earnings and cashflows is likely to rise due to weakening gas prices, and more LNG exports from the US will to the pressure.

With the rally in the share price over the last month and drop in UK power prices, Deutsche Bank said it is concerned about potential downside scenarios.

“Drax is a good asset with a strong management team, although market pressures are becoming increasingly severe.

“While we expect power prices to improve from current depressed levels, the shares appear to price in a significant recovery already and the downside scenarios for earnings and cashflow are challenging if power prices to not improve.”

It also noted that Drax is a risky stock, partly because of its sensitivity to power prices, operating costs, and regulatory factors.

Investors took the note to heart, with the shares down 16.9p (6.52%) to 242.20p at 1008 GMT.