JP Morgan has reiterated 'overweight' ratings on SSE PLC (LSE:SSE) and Centrica PLC (LSE:CNA), arguing that the effects of the Middle East conflict will continue to support European power prices and that utility stocks are well placed to benefit.
The bank named SSE as one of its top picks in European utilities alongside Germany's RWE, noting that both offer double-digit earnings per share growth rates above the sector average.
Centrica, the British Gas owner, was highlighted among a group of lower-multiple stocks with attractive risk-reward profiles and the potential to deliver positive earnings surprises in a backdrop of increased commodity volatility.
In a deep dive into European power market dynamics, JP Morgan identified three ways utilities stand to gain from the current environment.
First, companies will benefit moderately from higher baseload power prices driven by elevated gas costs.
Second, the bank expects a demand uplift for long-term power purchase agreements (PPAs), contracts that lock in electricity prices for buyers, which could create a virtuous circle by encouraging additional power demand across Europe.
Third, and perhaps most significantly, JP Morgan argued that utilities with flexible generation assets, power plants that can ramp output up and down quickly, will enjoy a higher margin uplift than most investors appreciate.
The bank said the move in baseload prices masks a more significant increase in peak prices, which disproportionately benefits operators with flexible capacity.
On the politically sensitive question of windfall taxes, JP Morgan acknowledged that more headlines are likely through the year but said it expects policymakers to focus on efforts to decouple gas and power prices through investment in alternatives rather than imposing radical intervention.
The bank also flagged France's Engie and Spain's Naturgy as overweight-rated names offering attractive entry points alongside Centrica at the lower end of the valuation spectrum.
SSE shares were trading at around 2,403p on Friday, while Centrica was at approximately 197.5p. Both were down around 2%.