Nomura retains neutral stance on Drax on margin uncertainty

1st Aug 2012 12:45

Analysts at Nomura have today issued positive comments on the guidance offered yesterday by Drax Group; in particular, as regards its biomass conversion details.In this regard, they explain how Drax stated confidently that it believes it can convert 3 of its 6 units to 100% biomass profitably using conservative assumptions. Furthermore, the company announced a 2mt biomass procurement contract which will provide over 70% of the required biomass for the first unit conversion, scheduled for completion in the first half of 2013. It also announced a loan facility with M&G for GBP 100m, which has a 6-8 year tenor. Nomura, however, still sees some potential clouds on the horizon.More specifically, it says that, "while the ROC banding visibility and progress on biomass contracting and financing provides reassurance, we think there is still a lack of visibility around margins on the biomass output, which is likely to persist."The above leads its analysts to the following conclusion: "we think a circa 10% discount to a blue-sky scenario remains appropriate and we retain our 470p PT and our Neutral rating."AB