Drax’s gearing to rising power prices is not reflected in its share price, according to the latest note from US bank JP Morgan.
Shares in the generator are up 8% year-to-date compared to forward price rises for winter 23/24 forwards up to 125%, notes the broker.
“In our view, the material discount implies that investors are either pricing in 1) power prices materially below current forward curves; 2) a very punitive windfall tax; and/or 3) energy market reform materially lowering medium-term power prices.”
JP Morgan expects Drax to upgrade 2022 underlying profit [EBITDA] expectations, and disclose a strong forward hedging position with its interim results (July 26th).
“We also expect the government to publish a consultation on business models for engineered Greenhouse Gas Removals (GGRs) this summer.
“This should be a positive catalyst for Drax, which seeks to develop two Bioenergy with Carbon Capture & Storage (BECCS) units by 2030.”
Buy with a price target of 975p is the broker’s view.