Drax Group (LSE:DRX) shares fell almost 3% to 728p on Friday after UBS began coverage with a 'sell' rating and a 600p target price, implying around 20% downside.
The bank argued that too much optimism is priced into the UK biomass-burning power group’s shares, given looming changes to government support and weakening biomass economics.
Analyst Mark Freshney said Drax’s main subsidy schemes are due to expire in April 2027, to be replaced by a less generous contract capped at 6 terawatt-hours a year through 2031.
UBS estimates this will cause a sharp drop in earnings, with group EBITDA between 2027 and 2030 running £530-560 million, or as much as 23% below the company’s £650 million target. Its 2026 and 2027 earnings forecasts sit 11% and 17% below consensus.
Although Drax remains the largest player in wood pellets, UBS sees growing overcapacity as the market adjusts to the new support regime.
Drax’s internal pellet sales run at around £250 a tonne, compared with £220 for third-party sales. As it cuts external volumes after 2027, it will compete directly with its suppliers, potentially depressing margins by £50-100m a year.
The bank also questioned the long-term sustainability of biomass as a transition fuel, noting rising costs and environmental scrutiny. Government backing, UBS said, “comes at a high price”, around £1.8 billion in real 2012 terms across 2027–31.
Possible upside could come from redeveloping its Yorkshire site for data centres or supplying feedstock for sustainable aviation fuel, but UBS said these remain early-stage options.
With limited power price exposure and support fixed until 2027, UBS concluded that Drax’s valuation “is not compelling given the biomass mix.”
Its 600p price target is based on a sum-of-the-parts model using an 8.3% cost of capital and a 9x multiple for flexible generation assets.