Highlights

  • Jefferies FY25–27 EBITDA/EPS estimates exceed consensus by 2% and 5%, respectively
  • Biomass generation expected to contribute £100–200m EBITDA under the bridging mechanism
  • An additional 10% share buyback authorised amid investment and market uncertainty

Jefferies resumed its coverage of Drax Group Plc (LSE:DRX) on Monday with a 'buy' rating and a 750p price target, citing its resilience amid regulatory and market uncertainty. The investment bank's outlook follows the company's FY24 results and a new agreement with the UK government on a biomass bridging mechanism aimed at securing energy supply and incentivizing low-carbon generation.

Jefferies updated its financial model and now expects more than £600 million of EBITDA from 2027 onward, with £100–200 million annually contributed by biomass operations during the bridging period. This new datapoint marks a significant increase in earnings visibility compared to their last projection in December 2024.

The bank raised its FY25–27 EBITDA and EPS estimates by 2% and 5% above Visible Alpha consensus, respectively. It also addressed potential regulatory risks, noting that proposed zonal pricing in the UK power market would have a minimal downside effect on Drax’s revenues. While Drax’s hydro assets could face modest pressure, its OCGT (open-cycle gas turbine) plants, expected online in 2025 and located in southern UK, might benefit from higher prices under regional pricing adjustments.

Jefferies also highlighted possible shareholder returns, noting room for additional buybacks beyond the current £300 million programme, which received shareholder approval at the May AGM. The newly authorized buybacks represent up to 10% of outstanding shares as of March 2025.

While Drax was recently outbid for UK battery storage opportunities, Jefferies pointed to its balance sheet strength as a factor enabling continued capital return strategies. The report acknowledges investment uncertainty but reflects confidence in Drax’s medium-term earnings trajectory and regulatory positioning.