UBS is persisting with a sell rating for Drax Group (LSE:DRX), whilst lifting earnings forecasts, with analysts arguing the power generator’s £1.6bn acquisition spree changes the shape of the business but not the valuation case.
The Swiss Bank has a 12-month price target pitched at 745p, marginally below the current price of around 752p, and that's after Drax added recent battery storage and solar deals to its model.
UBS said the transactions are “EPS accretive but value neutral”. The bank is raising its 2028 and 2029 EPS forecasts by 18% and 22%, respectively, as Drax deploys around 40% of pre-deal enterprise value into the acquisitions.
The reshaping makes Drax more diversified than at any point in its history, the bank notes, with its exposure now spanning biomass, pumped storage, battery storage, solar, wind, hydro, open-cycle gas turbines and energy supply.
But UBS sees challenges; for one, it describes battery storage as looking demanding, though it added the Bluefield Solar Income Fund deal appears lower risk; meanwhile, the existing biomass operations are more of a concern. UBS expects the legacy biomass generation business to deliver around £300mln of annual EBITDA through March 2031, but warns pellet costs remain structurally challenged.
