Drax Group (LSE:DRX) shares have been hit by the company’s use of factoring and other tools to improve its working capital, notes JP Morgan, but the US bank believes the 27% drop since August is taking too severe a view.
JP Morgan admits it previously underestimated the use of these tools by the power generator, which has increased, particularly in 2022.
The cost of using tools such as deferred letters of credit has also increased.
“Still, we believe that the market is being too harsh in the way it values the use of these facilities, particularly as it relates to factoring receivables.“
The US bank estimates the market is knocking around £1.1 billion of Drax’s valuation due to the use of factoring while also assuming a minus number for its growth spending on projects such as Beccs.
“We have lowered our Drax valuation, incorporating what we see as a conservative adjustment for the use of working capital management, as well as our view of conservative assumptions around profitability and value creation.“
JP Morgan’s new target price is 740p (previously 830p), which still implies a 73% upside potential to the share price.
'Overweight' remains its investment stance. Shares were down 0.5% at 425.6p.