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Utilities shares 'not insulated' from coronavirus risks, analysts say

UBS and RBC Capital Markets both downgraded British Gas owner Centrica, though were both positive about National Grid

SSE PLC -

The utilities sector is not as immune from the coronavirus as many might have anticipated, leading to various investment bank analysts revising their views. 

British Gas owner Centrica PLC (LON:CNA) was downgraded by both UBS and RBC Capital Markets to ‘neutral’ and ‘underperform’ respectively on Tuesday. UBS slashed its target prices to 30p from 105p, while RBC cut to 33p from 85p.

Centrica is seen to be one of the utility companies with the greatest exposure to “new risks”, said UBS, of power prices, retail billing and the restrictions on mobility that may affect services staff visiting certain cites.

Already the worst-performing name in the sector, down 65% on a total shareholder return basis, RBC admitted downgrading at this stage “may be a little after the horse has bolted but there are few redeeming features”, seeing the stock as remaining challenged from “lower commodities, exposure to lower demand (UK and US), an increasingly stretched balance sheet and an inability to execute planned disposals”.

The wider European utilities sector is “more insulated than most sectors” from the potential societal and economic effects of the coronavirus pandemic, “but it is not immune”, said RBC.

Utilities biggest “will come from reduced energy demand and lower power prices, and potential increases in capital costs”, the RBC analysts said.

Similarly, the UBS analysts said their change of heart came as they were forced to “completely revise” their view of the sector from the changed market outlook earlier in the year.

UBS also put medium-risk SSE PLC (LON:SSE) ‘under review’ as the analysts examine UK risks in more detail, but upgraded National Grid PLC (LON:NG.) to ‘buy’ from ‘neutral’, with a target price kept at 960p.

National Grid is seen by UBS as one of only a few across Europe where the analysts see “limited exposure” to its main risks to the sector outlook. 

RBC also has National Grid as its only ‘outperform’ rating in the UK, while SSE is on ‘underperform’ as it faces commodity and supply risk and could follow Centrica in cutting its dividend.

One positive view was offered on Centrica, where JPMorgan Cazenove added the shares to its 'Q-Score' bullish list, a "quantitative score" that takes in multiple factors and "aims to find mispriced stocks by looking at aggregate components of value, growth, momentum and quality".

Centrica was added along with UK names Taylor Wimpey (LON:TW.) and Unilever (LON:ULVR).

Quick facts: Centrica PLC

Price: 38 GBX

LSE:CNA
Market: LSE
Market Cap: £2.22 billion
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