1. UK Utility Sector Landscape

The utility industry in the United Kingdom comprises mainly electricity, gas, and water markets. The energy and utility sector continues to power the economy and contributes billions of pounds in taxes and consumption through the supply chain. Within the energy sector, the low carbon and renewable energy economy (LCREE) is gaining prominence and has become an important contributor to the economy. Some of the largest sectors within the low carbon economy include energy efficiency products, bioenergy, nuclear, low emission vehicles, and onshore wind.

With reference to the recent data from the Office for National Statistics, Turnover in the UK's low carbon and renewable energy economy was estimated to be £41.2 billion in 2020. The energy-efficient products and low emission vehicles sectors were the largest sectors in the LCREE economy in 2020 and accounted for £12.1 billion and £6.8 billion of turnover, respectively. The energy-efficient sector is critical from an employment perspective, as it provides jobs to 42% of the total LCREE workforce.                                  

Key Trends in the Utility Sector

Risk Exposures to Utility Sector 

• COVID-19 Impact: COVID-19 pandemic has disrupted the utility sector with a fall in the consumption of electricity and gas. The impact of the pandemic still lingers on with the threat of new variants affecting the population and businesses.
• Presence of Prudent Regulations: The sector is under the purview of prudent regulatory measures which can impact the revenue generation and profitability of the sector.
• Climate Risk: The decline in consumption due to the COVID outbreak and restrictions caused a reduction in Greenhouse Gas emissions. However, with the economy being in the recovery phase, there is a possibility of an increase in emissions thereby raising climate concerns.

SWOT Analysis

Utility Sector Outlook

The United Kingdom's net-zero ambitions by 2050 requires significant investments and efforts across the economy and an unprecedented shift in the energy and utility sector. This is expected to increase renewable electricity demand along with decarbonizing supply. New generation technologies like carbon capture and storage, and clean hydrogen is also gaining traction in the sustainable space. In this regard, UK’s water sector is also looking to embrace open data technologies to project its operating assets, use of energy, etc. There are frequent M&A activities that happen in the sector and the latest being the acquisition bid for power generation firm ContourGlobal by private equity firm KKR. This highlights investor interest in the utility space along with the potential impact on the economy for a sustainable future.

2. Investment analysis and stocks under discussion (GRP and NTEA)

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

A. Greencoat Renewables PLC (LON: GRP)

(Recommendation: Speculative Buy, Potential Upside: ~14.61%, Market Capitalization: EUR 1.29 billion)

Greencoat Renewables PLC (LON: GRP) is an FTSE AIM 100 index listed Ireland-based company that invests in renewable energy infrastructure assets.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)   

From a technical standpoint, the stock is hovering between the middle and lower Bollinger band with 14-day RSI level of ~49.13.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 14.61% over the current price of EUR 1.155 (as of 18 May 2022, 08:05 AM GMT+1).

B. Northern Electric PLC (LON: NTEA)

(Recommendation: Speculative Buy, Market Capitalization: GBP 172.51 million)

Northern Electric PLC (LON: NTEA) is an FTSE main market listed company engaged in electricity distribution and related services.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the stock is trading close to its lower Bollinger band, with a low 14-day RSI level of ~36.05, indicating an oversold stance.

Conclusion

Based on the decent top-line performance, access to funding, and oversold technical stance, we have given a “Speculative Buy” recommendation on Northern Electric PLC at the closing market price of GBX 137.00 (as of 17 May 2022). The stock has not started trading as of 18 May 2022, at 11:39 AM GMT+1.

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

Note 2: Investment decisions should be made depending on the investors’ appetite for 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 is subject to the factors discussed above.

Note 3: Target Price refers to a price level that 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 4:  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 5: 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 the 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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