Drax slumps on Goldman downgrade

11th Sep 2015 09:08

(ShareCast News) - Drax was under the cosh after Goldman Sachs downgraded the stock to 'sell' from 'neutral' and slashed its price target to 230p from 300p.It said that as regards the outcome of the EU's deliberations on whether to permit the proposed fixed price CfD for Drax's third unit conversion to biomass, the current share price is already discounting a best case scenario.GS said it sees more than 60% downside in the stock if the CfD is rejected.It noted that Drax's share price is down 40% year-to-date, closing following the fall in UK power prices in 2014 and 2015."However, we argue that it should have underperformed UK power, as we believe the likelihood of receiving a favourable subsidy for its third unit conversion to biomass has reduced over this period."The bank attributed this to lower power prices and negative read-across from other regulatory developments.While Drax offers a free cash flow yield of more than 10% from 2018 versus a sector average of 7%, this is the result of very low capex and is not sustainable in the long term, added Goldman.At 0918 BST, Drax shares were down 3.5% at 256.50p.