Drax Group "First look following group reshaping" (Sell) Freshney

Research evidence excerpt

Drax Group "First look following group reshaping" (Sell) Freshney

se is that BESS can

earn cost of capital but no more. Reserve margins in the UK are at their highest levels since Winter

2019/20 at c10%, and no electricity capacity market notices have been issued since January 2025.

We note restructuring of the Canada and US North pellets businesses, but there is the possibility of

further downgrades. We acknowledge opposing views on the topic of biomass sustainability, which,

for example, may eventually challenge government policy. Maintain Sell.

EVIDENCE We have reviewed 20 years of data for Drax and reviewed scenarios under Clean Power 2030. We

have looked in-depth at the pellets business. Targets set at CMDs in recent years have not been met.

WHAT´S PRICED IN? We believe the market is paying book value for the recent deals and OCGTs (i.e. no value destruction).

Drax is also pricing in 10x EV/EBITDA for the pumped storage and the NPV of cash flows from the

biomass assets (£1bn) which is where the downside risk is. We believe the shares price in around

£150m for future optionality.

8TWh (extra at £140/

+/-5% on +/-1% on +/-£25/MWh on Valuedrivers MWh) / 5TWh on

pellet costs retail margin storage spreads

biomass

1,140p upside 175p 70p 60p 90p

745p base

470p downside -55p -70p -60p -90p

Source: UBSe

Company Description Drax is a vertically integrated utility. It has c5m tonnes p.a. of pelletisation capacity in North America,

and has four 645MW biomass-fired units in Yorkshire capable of producing c15TWh p.a. It supplies

c12TWh p.a. of electricity, mainly to industrial and commercial customers through its supply business.

It also owns a pumped storage facility in Scotland and three OCGTs in receipt of capacity payments.