Utility Stocks Safe Following Conservative Win

Centrica escaped a disastrous outcome if the Labour Party's Ed Miliband had gone through with his proposals to freeze energy prices and break up the largest retailers

Charles Fishman 11 May, 2015 | 12:13PM
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We are reaffirming our fair value estimates, moat ratings, and moat trend ratings for utilities with U.K. exposure following the Conservative Party's win in the United Kingdom's general election May 7. Last year, rising retail energy prices placed a bull's-eye on utilities and energy retailers in the early U.K. election rhetoric. 

In particular, Centrica (CNA) escaped what could have been a disastrous outcome if the Labour Party's Ed Miliband had gone through with his proposals to freeze energy prices and break up the largest retailers, like Centrica. The election could make Iain Conn, Centrica's new chief executive, less likely to divest the company's retail natural gas business, which currently has an industry-leading 36% market share.

Conn indicated in February, after being on the job only seven weeks, that he was making a complete review of Centrica's strategy. We are reaffirming our £3.40 fair value estimate and narrow moat and stable moat trend ratings for Centrica.

Political backlash related to rising retail energy prices also threatened to hurt earnings and returns on capital for other utilities with generation or retail businesses in the U.K. Like Centrica, SSE (SSE) has been facing retail pricing pressure and weakness at its wholesale unit.

We believe constructive regulation could allow for further investment at regulated transmission and distribution networks segment, which has been the company's growth catalyst as of late. RWE, which gets about 10% of its operating income from the U.K., and Electricite de France, which gets about 20% of its income from the U.K., also stood to suffer from significant policy changes.

For U.K. grid operator National Grid (NG.), political pushback on higher network fees to compensate the company for its large investment plan could jeopardise what we consider one of the most constructive regulatory structures in the world.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Centrica PLC141.15 GBX-1.91Rating
National Grid PLC889.40 GBX-11.50Rating
SSE PLC1,740.50 GBX-1.64Rating

About Author

Charles Fishman  Morningstar Equity Analyst, Equity and Credit Analysis

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