1. UK Utility Industry Landscape

The Utility sector refers to a category of companies that provide basic amenities, such as water, sewage services, electricity, dams, and natural gas. It is a large sector and plays an important part in UK’s economy. It caters to the needs of millions of homes, schools, and hospitals. Furthermore, this Industry is responsible for supplying electricity, gas, and water across the entire UK. The gradual shift towards renewable energy sources and increased reliance on digital technology have managed to transform the whole sector.

The companies that are in the Utility sector are energy, electricity, water, natural gas and sanitization & waste disposal companies. Some favorable actions from the government on this sector empowers new technologies, enhancing competition and driving down the cost of consumers. Now, Oil companies and other traditional-energy players are entering the renewable-energy field, making the whole sector an attractive pick for Investors as these stocks can be considered as long term holdings.

Source: Analysis by Kalkine Group

Risk Exposures to the Utility Sector

• Technological changes: The risk due to technological changes in renewable generation, storage technologies, energy trading, and financial markets can hamper the ability to be competitive in the new investments.
• Cyber & Information Security: Any internal or external attack on the system and infrastructure can result in service unavailability or data breach. The potential for a loss of data or information could affect the service provision.
• Retail & Commercial: The failure to provide good and fair service to customers and retailers. Any disruption in the supply could impact profitability and could result in a risk of financial loss. The lack of customer-focused service can bring down the experience of the customers.
• Disruption in Supply: The risk of excessive cross-border tariffs or negative regulation on foreign capital flow could have an impact on our supply chain and limit the flexibility in cross-border investments.

SWOT Analysis

Benchmark Index Performance

Based on the last one-year performance, the FTSE All-Share Gas Water & Multiutilities index has outperformed the FTSE 100 and FTSE 250 indices. The FTSE All-Share Gas Water & Multiutilities index generated a return of about 32.80%; however, the FTSE 100 produced a return of around 12.54%, and FTSE 250 generated a return of approximately 9.76%

Figure 1: One Year Benchmark Index Performance

Utility Sector Outlook

The utility sector’s investment will be driven by the government's initiative to make the UK net carbon-free by 2050. The performance of the utility sector can be assessed in a long-term context considering the cycle of the business. Moreover, the industry aims to fund the projects based on a distinctive long-term horizon. The companies operating in the utility industry also have a large amount of money as pension assets, and many older people are dependent on such companies for a regular stream of income. Furthermore, it relies heavily on successfully raising long-term funding from banks and credit investors to fund our capital investment program and refinance upcoming debt maturities. Overall, the UK’s utility companies are defensive players as they pay a consistent dividend (with some exceptions) to the investors, with a decent shareholder return.

2. Investment analysis and stocks under discussion (PNN, NTEA, UU.)

After gaining insights into the Utility sector, we would look at the business model of three Utility players listed on the London Stock Exchange. 

A. Pennon Group PLC (LON: PNN)

(Recommendation: Buy, Potential Upside: 11.63%, Market Capitalization: GBP 3.02 billion)

Pennon Group PLC (LON: PNN) is an FTSE 250 Index listed Environmental Infrastructure Company, which provides services related to waste management, water & wastewater, and water retail services.

The Company has announced 28 January 2022 a record date for Interim dividend and the payment date is 5 April 2022.

The Company will announce its next Trading Statement on 1 April 2022 and publish full-year results on 31 May 2022.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group) 

From a technical standpoint, the stock price is trading between the lower Bollinger band and the middle Bollinger band, indicating an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 11.63% over the closing price of GBX 1,117.00 (as of 18 January 2022).

B. Northern Electric PLC (LON: NTEA)

(Recommendation: Speculative Buy, Potential Upside: 19.63%, Market Capitalization: GBP 189.37 million)

Northern Electric PLC (LON: NTEA) is an FTSE listed company. It is part of the Northern Powergrid Holdings Company and its subsidiaries group of companies. The Company distributes electricity to approximately 1.6 million customers connected to its electricity distribution network in the Northeast of England.  

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the 14-days RSI of ~40.44 indicates an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 19.63% over the closing price of GBX 148.00 (as on 18 January 2022).

C. United Utilities Group PLC (LON: UU.)

(Recommendation: Expensive, Potential Downside: 16.44%, Market Capitalization: GBP 7.27 billion)

United Utilities Group PLC (LON: UU.) is an FTSE 100 Index listed company in water and wastewater services. It mainly serves in the North-West of England.

The interim dividend of 14.5 pence per ordinary share is expected to be paid on 1 February 2022 to the shareholders. The ex-dividend date for the interim dividend was 16 December 2021.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the 20-days EMI of GBX 1,074.50 suggests a correction in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has a downside potential of 16.44% over the closing price of GBX 1,065.50 (as on 18 January 2022).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

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

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