The European utilities sector is facing the “most positive structural backdrop since the financial crisis”, Deutsche Bank analysts believe, leading them to upgrade National Grid PLC (LON:NG.) and nudging up target prices for many others.
“The turn in earnings cycle, increasing confidence in utilities’ investments, low bond yields and enthusiasm for ESG plays have propelled the sector,” said analyst James Brand in a note to clients on Friday.
Within the sector, the analyst noted there has been a “sharp divergence with perceived quality being rewarded, although with much lower multiples for utilities with a more mixed track record, or in some cases cyclicality”.
This positive structural backdrop has been reflected in historic high valuation multiples already, he added.
Presenting the results on a long-term study on company reporting, aimed partly to help inform on whether the divergent in quality is justified, the analyst said he and his team think it is “broadly… and continue to orient to high quality integrated utilities” such as Italy’s Enel and Spain’s Iberdrola, plus regulated networks such as UK water.
While recognising the risks around the UK regulatory review that could affect National Grid, it was upgraded to ‘buy’ following the weakness in its shares, with the target price upped to 940p from 910p, versus a previous close of 877.4p.
Among the other target price changes SSE PLC (LON:SSE) was upped to 1,270p from 1,100p and kept at 'hold'.
NG shares were up 2% to 894.4p on Friday morning.