1. UK Utility Industry Landscape

The utility industry is a vital part of the UK's economy as it caters to the needs of millions of homes, businesses, schools, and hospitals. Moreover, the industry is responsible for supplying electricity, gas, and water across the entire UK. In addition, the gradual shift towards renewable energy sources and increased reliance on digital technology had managed to transform the sector. There are six major distribution network operators, which include UK Power Networks, Western Power Distribution, and Scottish & Southern Electricity Networks. Moreover, they manage local power lines, cables, and substations. The transmission operator, such as National Grid, has a high voltage electricity system. Furthermore, the prominent players of the gas sub-sector are Wales & West Utilities and Northern Gas Networks.

According to the recently available data from the UK trade association for the energy industry, around 738,000 people are employed in the sector. Moreover, the industry attracts significant investments of around £13 billion every year to deliver power and energy to 28 million homes and businesses. The average daily water consumption in the UK is around 143 litres, which is constantly increasing. A significant portion of the water gets lost in the leakage, and the agencies are putting effort to reduce the water leakage by around 16% between 2020 and 2025.

Key Trends in the Utility Sector

Risk Exposures to the Utility Sector

SWOT Analysis

 

Benchmark Index Performance

Based on the last six months performance, the FTSE All-Share Gas Water & Multiutilities index has outperformed the FTSE 100 and FTSE 250. The FTSE All-Share Gas Water & Multiutilities index generated a return of about 6.06%; however, the FTSE 100 generated a return of around 3.72%, and FTSE 250 generated a return of around 3.35%

Figure 1: Six Months Benchmark Index Performance

 (Source: Refinitiv; Analysis done by Kalkine Group)

Utility Sector Outlook

The gas market chaos in the UK had pushed prices 280% higher in Europe this year because of several factors such as higher demand from Asia, lesser-than-expected gas supplies from Russia, low renewable output & gas and nuclear maintenance outages. Moreover, the higher gas price would fuel up the winter electricity bills and bring down the consumption levels. Meanwhile, the industry is highly dependent on long-term funding from banks and credit investors to fund the capital investment program and refinance upcoming debt maturities. The sector will require additional investments to provide better service to customers and enhance the environment. Overall, the UK’s utility companies are defensive players in terms of the shareholders’ returns as they pay a regular dividend (with some exceptions) to the investors.

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: 21.11%, Market Capitalization: GBP 3.14 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 paid a final dividend of 14.97 per share on 2 September 2021 (attributable for FY21).

Pennon's results for the half-year ending 30 September 2021 will be announced on 30 November 2021.

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 21.11% over the closing price of GBX 1,148.00 (as of 05 October 2021).

B. Northern Electric PLC (LON: NTEA)

(Recommendation: Speculative Buy, Potential Upside: 23.81%, Market Capitalization: GBP 163.03 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 ~5.89 indicates an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 23.81% over the closing price of GBX 146.00 (as on 05 October 2021).

 

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

(Recommendation: Watch, Potential Downside: 12.79%, Market Capitalization: GBP 6.73 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 Company will declare its half-yearly results for the period ending 30 September 2021 on 24 November 2021.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the 20-days EMI of GBX 1,011.69 suggests a correction in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has a downside potential of 12.79% over the closing price of GBX 986.80 (as on 05 October 2021). 

*All forecasted data and peer information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*The "Buy/Speculative Buy” recommendation is also valid for the current price as covered in the report as on 06 October 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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