Analysts at Deutsche Bank took a fresh look at the European utilities sector on Tuesday, downgrading Pennon and United Utilities from ‘buy’ to ‘hold’ and upgrading SSE from ‘hold’ to ‘buy’ as a result.
Deutsche Bank stated that after years of outperformance, European utilities had “strongly underperformed” the market in 2021 by around 14%, something it views as being driven more by sharp reversals in earnings than by bond yields.
However, DB also said the outlook for the sector was, in many ways, still “very positive”, highlighting opportunities for attractive investment-driven growth for many utilities, driven by long-term decarbonisation trends, rising power prices and strong balance sheets.
Focussing on the British names in its coverage, DB said the four UK regulated utilities had rallied “strongly” since their March lows, with gains of over 15%.
“Comparing the four stocks, National Grid and Severn Trent have much stronger RAB growth (>7% and c.4%, respectively in 2022/23) than Pennon and United Utilities (c.2%). While both trade on fair high premia to RAB (42% and 26%, respectively), the scope for strong value-creating growth could drive further upside,” said the analysts.
“For Pennon, having had more time to reflect, we continue to view its announced acquisition of Bristol Water as value-neutral. Our republished model incorporates its recent acquisition and prospective capital return, with scope for quite strong earnings growth over the next few years (EPS trending up to 70.0p by 2024/25).”
As far as SSE was concerned, the German bank stated it fit well into its strategy of looking for utilities with strong growth opportunities and established track records, although ones where “not too aggressive assumptions for value creation” were factored into share prices.
“We see a lot more near-term catalysts for SSE,” said DB, which also hiked its target price on the stock from 1,500.0p to 1,670.0p.
In the same note, Deutsche Bank also moved continental firms Iberdrola from ‘buy’ to ‘hold’, Italgas from ‘sell’ to ‘hold’, Red Electrica from ‘hold’ to ‘sell’ and Terna from ‘hold’ to ‘buy’.
