Goldman Sachs Upgrades Drax to 'Buy' on Strong Cash Flow and Data Center Potential

Goldman Sachs upgraded U.K. power generator Drax Group to 'Buy' from 'Neutral' on Tuesday, citing strong free cash flow visibility and the significant potential to develop a large-scale data center at its primary power station site.

In a note to clients, the investment bank raised its 12-month price target for Drax to 1,020p from 924p, which represents a potential upside of approximately 31.6% from the stock's previous closing price of 775p.

Rationale for the Upgrade

Goldman Sachs analysts argued that the market's perception of Drax as a company overly dependent on government biomass subsidies set to expire in 2031 is outdated. The report highlighted that recent investments in flexible generation, battery storage, and solar assets have fundamentally changed the company's long-term earnings profile.

The bank forecasts that Drax will generate approximately £3.5 billion in cumulative free cash flow between 2025 and 2031, an amount equivalent to 1.4 times its current market capitalization. Goldman Sachs projects that about one-third of this cash, or 50% of the company's market cap, will be returned to shareholders via dividends and share buybacks. The bank anticipates Drax will restart its paused £450 million share repurchase program in the third quarter of 2027.

Future Growth Catalysts

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By 2032, Goldman Sachs estimates that renewables and flexible generation assets will account for roughly 90% of the group's EBITDA. The report pointed to three key catalysts that could drive further valuation upside:

• Data Center Development: Converting part of the Drax Power Station site, which has over 1,000 acres and 4 GW of grid access, into a data center could add up to 207p per share in value.
• Pipeline Deployment: Utilizing its balance sheet to develop its 2.2 GW net project pipeline could add another 103p per share.
• Subsidy Extension: A potential extension of Contracts for Difference (CfD) for the power station beyond 2031 could generate up to £200 million in additional annual EBITDA by 2035.

Market Outlook

Goldman Sachs stated that Drax's strategic shift has created a more favorable risk-reward profile for investors. "In our view, this creates a picture with a risk-reward skewed to the upside," analyst Ajay Patel wrote in the note.

The upgrade suggests that the market may be undervaluing the company's diversified energy portfolio and its strategic real estate assets, which are well-positioned to capitalize on the growing demand for data infrastructure.