Utilities: Exane BNPP Prefers Enel, Enagas, Engie

Exane BNP Paribas has upgraded its rating to Outperform on Enel (TP of €4.8) and Enagas (TP of €28), which add to its O/P rating on Engie (TP €16.1).

Source: Exane BNP Paribas

« 2016 was the first year in a decade that the sector delivered positive EPS growth. 2017 should be the first year in a decade that dividend yield + three-year EPS CAGR (3%) will exceed the 8-10% return on equity that we believe the market requires », write its analysts in a report dated Jan 9. « It should also mark the first year since 2004 that the EPS CAGR of integrated utilities outpaces that of regulated utilities. Strategies are set and the next three years will be about a – bumpy – execution as fundamentals stabilise if not improve », they add.

Utilities are yet sensitive to interest rates and the rise in bond yield has been detrimental to the sector (Stoxx Europe 600 Utilities index for instance has lost close to 10% since its peak on July 26, 2016). To Exane, interest rate risk has been exaggerated by the market.

« The link between poor capital allocation and falling rates should also not be overlooked. However, the political risk might be unduly underplayed by the market and we would be especially concerned about Germany and Italy. Positioning could also remain a headwind, with the SX6P now less than 4% of the SXXP, likely causing investors to look for ‘simple stories’, rather than value. »

While sector is « fairly valued » (with 2.9% upside on average on Exane’s estimates), there are still some opportunities in there.

« Some 70% of integrated utilities’ EV comes from regulated and quasi-regulated assets. Differentiating across subsectors will not be as relevant in the future. Even the most Overweight utilities portfolio will likely not have more than three utility stocks, so top picks (Iberdrola, Enagas, Innogy) and stocks to avoid (E.ON, Italgas, Fortum, EDP) are less useful in 2017. We see more alpha in pair trades: Innogy over E.ON, Enagas (raised to Outperform) over Red Electrica, Uniper over Fortum, Snam over Italgas, Enel (raised to Outperform) over Endesa and SSE over Centrica. »

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