Utilities have fallen out of favour a little with the rise in bond yields in the US and UK, but earnings across the sector should be supportive in the next round of updates says Citi, which still likes National Grid PLC (LSE:NG.) and SSE PLC (LSE:SSE).
Due to the links to bond yields as a competing asset, Citi notes the European Utilities sector is down 3.5% relative to the market in recent weeks, mostly due to all attention being focused on US bond yields and on political uncertainty, which keeps weighing on the sector.
Putting that aside, Citi sees the approaching an earnings season will some small earnings beats and reassuring outlook statements given the supportive commodity price environment and political support to network investments.
The recent rise in gas futures is also supportive and Citi believes a combination of robust commodity prices and resilient demand will be reflected in solid earnings releases by most European utilities.
In the UK National Grid and SSE have underperformed the sector by 3% and SSE by 8% respectively, predominantly driven in Citi’s view by the 59 (0.59%) basis point rise in the UK 10-year gilt yield.
Favourable developments are the RIIO-T3 Business plans, which JP Morgan said underpin the estimate of a 20% a year growth in SSE’s Electricity Transmission business and Grid’s guidance of £60 billion of capex in the five years to 2029, both of which it sees as attractive.
Shares in National Grid were up 0.5% at 936.4p today with SSE 0.3% higher at 1,577p.