Drax Group (LSE:DRX) has been downgraded to 'neutral' by Citi after a strong run in the shares, with the broker arguing that much of the upside from artificial intelligence and data centre optionality is now reflected in the valuation.
Drax shares have risen about 25% over the past three months, outperforming a sector Citi views as broadly fully valued.
Citi said its previous upgrade had been driven by the embedded optionality in Drax’s legacy generation assets, particularly the potential for artificial intelligence and data centre development, which it assessed on a probability-weighted basis.
The broker now believes that upside is largely priced in and sees rising expectations for delivery to justify the current valuation.
In the near term, Citi highlighted Drax’s strategic pivot towards its FlexGen business, which it believes could benefit from structural changes in the UK energy system.
The pellets division remains more uncertain over the long term, although Citi said strong medium-term offtake visibility should help alleviate investor concerns for now.
Citi modestly raised its sum-of-the-parts-based price target to 923p but said the shares are already discounting much of the probability-weighted upside, prompting the downgrade.
In afternoon trading, the shares were off 1% at 861.44p.