Section 1.0. UK Utilities Sector Landscape, Trends & SWOT Analysis

The United Kingdom’s utilities sector comprises of water, electricity, and gas markets. As per the Office for National Statistics, the energy industry contributed 2.1% of gross value added with employed 181,000 people directly. The utility industry space has been witnessing a gradual shift towards renewable energy sources, which has been further accelerated by the macroeconomic concerns, such as the COVID-19 pandemic, geopolitical tension, disruption in energy supplies, among others. Adjacently, a temporary price cap has put a revenue cap for power generators. Similarly, selling in the regulated water utility sector amid rising borrowing costs and higher interest rates has also been impacted the margins. Subsequently, this sector is currently offering a value-buying opportunity.

In the UK, the regulator Ofgem (The Office of Gas and Electricity Markets) controls the energy prices in the form of a price cap. It has been witnessed that the energy prices have been shot up due to the increased consumption after Covid-19 pandemic led restrictions and ongoing war in Ukraine. As per the House of Common Library, Household energy bills have increased rapidly. The average bills were £760 in 2021 compared to £450 in 2020, a 36% real increase. On 8 September 2022, the Prime Minister announced that a new Energy Price Guarantee scheme to replace the price cap from 1 October 2022.

Section 1.1. Trends in the Utilities Sector

Section 1.2. SWOT Analysis

Section 2.0. Sector Risks & Opportunities

Section 2.1. Risk Exposures to Utilities Sector

Section 2.2. UK Utilities Sector Outlook

Dividend focused investors get a shelter in the utility sector usually; however, the sector has recently got a hit due to rising bond yield, currency risk, and the ongoing energy crisis.

On 12 October 2022, the UK government introduced an Energy Prices Bill to support consumers and businesses through Energy Price Guarantee for domestic consumers and Energy Bill Relief Scheme for businesses and non-domestic properties. Also, the generation of electricity from natural gas has become quite expensive, which can compel the UK to produce majority of its electricity through clean domestic sources.

In addition - decarbonization, decentralization, and digitization have become the focus area in the utility space. As the net-zero movement gathers further steam, the utility companies have an important role to play and lead the transition phase. The recent heatwaves across Europe further strengthen the case for a rapid ramp-up of green energy and sustainable technologies to deliver the same. The sector is an indispensable part of the economy and the emergence of new technologies in the field of solar and wind energy augurs well for its diversification.

Section 3.0. Pennon Group PLC (Buy at GBX 828.00, closing market price of 18 October 2022)

3.1 Company Details

3.2. Key Metrics in Pictures

3.3 Valuation and Technical Guidance

Section 4.0: SSE PLC (Buy at GBX 1,480.00, closing price as on 18 October 2022)

4.1 Company Details

4.2. Key Metrics in Pictures

4.3 Valuation and Technical Guidance

Please note markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Note 1: Past performance is not a reliable indicator of future performance.

Note 2: The reference date for all price data, currency, technical indicators, support, and resistance level is 19 October 2022. The reference data in this report has been partly sourced from REFINITIV.

Note 3: Investment decisions should be made depending on an individual's appetite for upside potential, risks, holding duration, and any previous holdings. An 'Exit' from the stock can be considered if the Target Price mentioned as per the Valuation and or the technical levels provided has been achieved and is subject to the factors discussed above.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 5: ‘Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.’

Note 6: Dividend Yield may vary as per the stock price movement.

Technical Indicators Defined: -

Support: A level at which the stock prices tend to find support if they are falling, and a downtrend may take a pause backed by demand or buying interest. Support 1 refers to the nearby support level for the stock and if the price breaches the level, then Support 2 may act as the crucial support level for the stock.

Resistance: A level at which the stock prices tend to find resistance when they are rising, and an uptrend may take a pause due to profit booking or selling interest. Resistance 1 refers to the nearby resistance level for the stock and if the price surpasses the level, then Resistance 2 may act as the crucial resistance level for the stock.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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