Drax (DRX) Group Plc climbed to the highest level in almost five years in London as Goldman Sachs Group Inc. added the operator of the largest U.K. coal-fired power station to its conviction buy list from a neutral rating previously.
Drax rose as much as 3.8 percent in London to 678.50 pence, the highest price since Oct. 9, 2008, as Goldman said U.K. plans to pay low-carbon generators fixed subsidies will boost profits.
The company plans to spend as much as 700 million pounds ($1 billion) turning three of the six units at its site in Selby to burn biomass by 2016. The first was converted in April, while Drax plans to convert a second to burning wood chips by the middle of next year and a third in 2016. It spent 106 million pounds in the first half on its biomass conversion program.
Under U.K. plans released in June, power generated from converted biomass plants may receive 105 pounds a megawatt-hour.
“The new fixed-price subsidies for renewables including biomass recently published by the government indicate upside potential profits from the current renewable scheme,” Goldman analyst Andrew Meads said in a note. Meads increased his price estimate by 32 percent to 900 pence, from 684 pence.
Drax rose 2.7 percent to 671 pence by 2.56 p.m. in London.
Drax last week said first-half profit slumped 22 percent to 120 million pounds after a carbon emissions tax was introduced.
The company will be “very different” when it reports its first-half 2014 earnings, Mead said. By then two of the three units should have been converted. It will also probably decide to convert a fourth unit to burn biomass, he said.
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