RBC Capital Markets lowers target price on Drax, reiterates 'outperform' rating

RBC updated its Drax investment case to incorporate "a conservative view" of potential windfall taxes that may be introduced by the UK government as part of the Autumn budget later this week.

"We now assume 35% additional tax on generation for just over five yrs resulting in £1.5bn additional tax for Drax. This may be an overly aggressive assumption as the government may want to positively discriminate on renewable electricity versus oil and gas, and we also don't allow for capex offsets in our estimates," said RBC.

The Canadian bank also said clarity on government interventions should allow focus to return to the longer-term investment case. RBC thinks improved clarity on cashflows should allow investors to once more focus on Drax’s future growth options around BECCS, new pumped storage capacity at Cruachan, and continued expansion of its upstream pellet facilities.

"Even under our windfall tax assumptions, we see the £3.0bn capex plans as fully funded under the current balance sheet, with free cash flow yields averaging roughly 25% across the remainder of the decade. This leaves Drax approaching a cash neutral position by 2025 with debt then peaking at roughly £1.3bn (~2x EBITDA) at the end of the decade," said RBC, which reiterated its 'outperform' rating on the stock.

Reporting by Iain Gilbert at Sharecast.com