J.P. Morgan resumes Drax coverage with 1,000p target, sees 46% upside

J.P. Morgan has resumed coverage on Drax Group (DRX) with an "overweight" rating and a 1,000p price target for December 2026, implying 46% upside from the July 3 close. The firm forecasts 2025 adjusted EBITDA at £905 million, exceeding Drax's guidance, despite downward revisions for pellet production, hydro, OCGT, and retail EBITDA, with biomass remaining the key earnings driver. J.P. Morgan anticipates strong free cash flow of £473 million and a potential £200 million extension to the share buyback, placing Drax on a positive catalyst watch ahead of its July 31 interim results, with investor focus on shareholder returns and operational delivery.

Analysis

J.P. Morgan has resumed coverage on Drax Group with a strongly bullish 'overweight' rating and a 1,000p price target, implying 46% upside from its early July price. The core of their thesis rests on a 2025 adjusted EBITDA forecast of £905 million, which is notably above both Drax's own guidance and the prevailing Bloomberg consensus. This optimistic projection persists despite J.P. Morgan simultaneously lowering its EBITDA expectations for several of Drax's other business segments—pellet production, hydro, OCGT, and retail—due to specific operational headwinds like upgrade outages and grid connection delays. This indicates an extremely strong underlying forecast for the core biomass generation business, which is cited as the key earnings driver. The company's financial position appears robust, with projected net debt/EBITDA of just 1.0x in 2025 and a transition to a net cash position anticipated by 2027, supported by strong free cash flow generation of £473 million. Furthermore, the stock's valuation appears modest at a forward 2025 P/E of 5.6x, especially considering J.P. Morgan's sum-of-the-parts valuation of 988p per share excludes any potential value from future growth projects like BECCS or the Cruachan II expansion, suggesting a conservative valuation base. The firm has placed Drax on a positive catalyst watch ahead of its July 31 results, with investor focus centered on capital return announcements, such as a potential £200 million extension to the share buyback program, and operational delivery.

Key Decisions for Investors

• Given J.P. Morgan's bullish price target, low valuation multiples, and strong balance sheet, investors could consider the stock attractively priced, especially with the upcoming July 31 results flagged as a positive catalyst.
• Investors should closely monitor the interim earnings report for confirmation of the strong biomass performance needed to offset weaknesses in other divisions and for any official announcement regarding an extension of the share buyback program.
• The valuation case is supported by a conservative methodology that excludes future growth projects like BECCS, offering potential long-term upside for investors willing to look beyond near-term operational headwinds in the non-biomass segments.