1. UK Utility Industry Landscape

The utility industry is an integral part of the UK's economy as it served around millions of homes, businesses, schools, and hospitals. Moreover, the industry is responsible for supplying electricity, gas, and water across the entire UK. Meanwhile, the changing climate and rising population have put pressure on water supplies and electricity transmission & generation. The clean energy transition has created new opportunities for the power and utility sector. Amid the pandemic, the utilities and power sector were focused on keeping the assets in line and supplies up and running.

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 gas sub-sector are Wales & West Utilities and Northern Gas Networks.

The quality and environmental standards will be affected by the UK's exit from the EU. The new environmental and quality regulations will have a key impact on the business. The utility sector’s investment will be driven by the government's initiative to make the UK net carbon-free by 2050. 

Key Trends in the Utility Sector

Risk Exposures to the Utility Sector 

• Technological changes: The risk due to technological changes in renewable generation, storage technologies, energy trading, and financial markets (i.e. blockchain) 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 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 8.29%; however, the FTSE 100 generated a return of around 2.09%, and FTSE 250 generated a return of around 5.93%

Figure 1: Six Months Benchmark Index Performance

(Source: Refinitiv; Analysis done by Kalkine Group)

Utility Sector Outlook

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. 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 as they pay a consistent dividend (with some exceptions) to the investors, with a decent shareholder return.

2. Investment analysis and stocks under discussion (NG., GLO, ITM)

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. National Grid PLC (LON: NG.)

(Recommendation: Buy, Potential Upside: 26.02%, Market Capitalization: GBP 33.10 billion)

National Grid PLC (LON: NG.) is a London, United Kingdom-based electricity, and gas utility Company. It operates in the United Kingdom and the United States.

The Company will pay a final dividend of 32.16 pence per share on 18 August 2021, while the ex-dividend date was 03 June 2021.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)                               

From a technical standpoint, the stock price is hovering around the lower 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 26.02% over the closing price of GBX 922.00 (as of 20 July 2021).

B. ContourGlobal PLC (LON: GLO)

(Recommendation: Buy, Potential Upside: 23.72%, Market Capitalization: GBP 1.24 billion)

ContourGlobal PLC is an FTSE 250 Index listed Company, which is engaged in the power generation business. Moreover, it operates thermal and renewable energy plants across three key geographic regions – Europe, Latin America, and Africa.

On 06 August 2021, GLO expects to release half-year results for the six months ending 30 June 2021.

GLO had paid a quarterly dividend of 3.1675 pence per share on 11 June 2021, while the ex-dividend date was 20 May 2021.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the stock price is hovering around the lower Bollinger band, indicating an upside potential in the stock price. The momentum indicator 14-day RSI (~36.56) is also indicating an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 23.72% over the closing price of GBX 189.20 (as on 20 July 2021).

C. ITM Power PLC (LON: ITM)

(Recommendation: Avoid, Potential Downside: 26.15%, Market Capitalization: GBP 2.15 billion)

ITM Power PLC (LON: ITM) is a FTSE AIM UK 50 Index listed Company, which designs and manufactures integrated hydrogen energy systems for energy storage and clean fuel production.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

 From a technical standpoint, the stock price is trading lower than the 20-days exponential moving average of GBX 411.20, making it difficult for the stock price to show an upside potential.

Valuation Methodology

Our illustrative valuation model suggests that the stock has a downside potential of 26.15% over the closing price of GBX 391.00 (as on 20 July 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” recommendation is also valid for the current price as covered in the report as on 21 July 2021.

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

Disclaimer

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

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