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Drax drops 4% on outlook concerns

Discussion in 'Market News' started by Lily, Sep 22, 2016.

  1. Lily

    Lily Forum Member

    Aug 29, 2015
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    Analysts say power plant group faces headwinds due to lower prices

    Drax is the leading faller in the mid-cap index, down 4% on concerns about the outlook for the power station operator.

    Shares in the group - which is converting its plants to use biomass - have been volatile in recent months, gaining ground in the wake of Brexit as investors sought out defensive stocks such as utilities. But they fell back at the end of July after it warned that its full year earnings would be at the lower end of analysts’ expectations.

    Following severe under-performance in 2015, Drax’s share price has risen 50% in 2016. However we expect this outperformance to unwind due to headwinds in the UK power market. We see around 10% downside to current UK forward power prices due to: (i) growing renewables and interconnection capacity; (ii) weak demand; and (iii) a lower UK gas price.

    Drax’s earnings and valuation remains sensitive to movements in UK power prices. We see downside to UK power prices which is not currently reflected in Drax’s share price. We expect power prices to fall to £34 a MWh by 2018, versus the current forward price of £38 a MWh. A +£1 a MWh move in Drax’s achieved power price is +11% on 2017 EBITDA.

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