Jeremy Hunt's budget had some positives for Drax Group (LSE:DRX) but was disappointing for investors in renewables, according to investment bank analysts, while a higher defence budget is good for that the likes of BAE Systems PLC (LSE:BA.), Babcock International PLC (LSE:BAB), Rolls-Royce Holdings PLC (LSE:RR.) and QinetiQ Group PLC (LSE:QQ.).
Expectations for renewable developers to receive tax incentives or other support in the budget was high, noted Citi, but there is "initial uncertainty" on the definition of "new" capex for capital allowance, as in whether this refers to capex on new projects or capex on existing projects.
"While we wait for more clarity from the Treasury, Orsted have stated their disappointment given most of their UK offshore wind capex is outside the three-year window proposed."
Based on this understanding, long life infrastructure projects would qualify for 50% allowance over three years.
"Depending on the definition of capex, this could potentially provide some additional support for under construction projects," Citi said, such as Dogger Bank, a joint venture for SSE PLC (LSE:SSE).
Furthermore, read-across from the spring budget "does not support" expectation of an upward revision of the government's CfD strike price, but the analysts said they continue to believe the government "will not meaningfully change this cap", at least for the current round.
JPMorgan analysts generally agreed, saying their initial reading of the announcement of full capital expensing is that renewables, such as offshore wind, "will not qualify, as they are not considered 'main rate' property, plant & equipment", which did not qualify for super tax deductibility from 2021 either.
On the plus side, for other listed companies in the utilities sector, the government's provision of up to £20bn of funding for early deployment of carbon capture, usage and storage (CCUS) and announcement of a shortlist of projects for the first phase of CCUS deployment later this month, is "a key positive" for Drax.
On defence, JPM analyst David Perry noted that the UK’s total defence budget was equivalent to 2% of GDP in the past year, with Hunt's pledge to provide an extra £4.95bn for defence over the next two years, and £2bn each year for the following three years, along with an "aspiration" over the longer term to invest 2.5% of GDP in defence, should be a boon to BAE Systems as the UK’s sole manufacturer of nuclear submarines and ammunitions.
"However, we need to sound a large note of caution," he added, noting that BAE’s UK sales were £4.6bn and he is "not expecting BAE’s UK sales to rise by £2.5bn" in the coming years, which would equate to a 54% increase.
"We believe the extra money will be held on account by the MoD and spent over a number of years. However, the higher budget means that BAE and other UK defence companies (Babcock, Qinetiq, Rolls-Royce) could secure some important orders in the next few years," though any UK sales growth is not expected to in the next few years.
Pension changes offered investment platforms and wealth managers some "marginally positive" news, JPM added, with the increase in annual allowance (from £40k to £60k), a minimum tapered annual allowance (from £4k to £10k) and adjusted income threshold (from £240k to £260k).