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Investing.com -- Jefferies has resumed coverage of Drax Group (LON:DRX) PLC with a “buy” rating and a price target of 750p, reflecting a 13% upside from the prior close of 661p, in a note dated Monday.
The brokerage cites improved earnings visibility and limited exposure to regulatory risks as key drivers of its positive view.
Jefferies’ updated model places its FY25–27 EBITDA and EPS forecasts 2% and 5% above Visible Alpha consensus, respectively.
Analysts estimate £891 million in EBITDA for 2025 and £680 million for 2026, supported by hedged power price exposure and a stable earnings outlook.
Analysts see minimal impact on Drax from the possible introduction of zonal pricing in the U.K.
While hydro assets in northern regions may face pressure, Jefferies notes potential benefits for the company’s OCGT plants in the south, scheduled to start operations in 2025. These assets could capture higher margins if regional pricing is implemented.
Drax’s recent shareholder approval to repurchase up to 10% of its shares adds to upside potential, alongside an existing £300 million buyback program.
Jefferies flags a strong balance sheet, projecting net debt to EBITDA at 0.9x through 2028, well below the 2x threshold.
The 750p target, while reaffirming a bullish stance, marks a slight reduction from previous levels.
This revision reflects greater uncertainty around returns from the Cruachan hydro expansion and a revised net debt figure that now includes lease liabilities, in line with updated company disclosures.
Jefferies also points to the biomass bridging mechanism as a long-term earnings contributor. If finalized with the U.K. government, the agreement is expected to generate between £100 million and £200 million in annual EBITDA from April 2027 to March 2031. Jefferies has modeled £150 million.
The next scheduled update for investors is Drax’s first-half 2025 results on July 31, which Jefferies identifies as a potential catalyst. Final terms of the bridging mechanism are also expected during the summer.