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National Grid PLC downgraded by RBC but Drax and SSE targets upped

National Grid shares were downgraded by RBC but analysts upped their share price targets for Drax and SSE

National Grid PLC (LSE:NG.) was downgraded by RBC Capital Markets as it said positives for the utilities and renewables sector such as the energy transition, supportive power prices and a continued ESG focus were being undermined by rising interest rates, continued competition, pressure on returns and political risk.

The FTSE 100 energy network was cut to a ‘sector perform’ rating and a 1,100p share price target.

Meanwhile the analysts also looked at two energy providers that have transitions to clean energy in recent years.

SSE PLC (LSE:SSE) had its share price target hiked slightly to 1,825p from 1,800p as its renewable prospects “remain strong through the energy transition, and we believe the company has a robust operation in the UK wind market, with attractive global expansion opportunities”.

For Drax Group (LSE:DRX), where the target was also upped to 925p from 750p, mid-term prospects “have improved, in our view”, reflecting the supportive power price outlook.

With questions over how clean and green energy generated from biomass can really be, the analysts said: “The most material item now facing Drax is the sustainability of its supply chain for the production and distribution of millions of tonnes of wood pellets. Drax will need to work closely with environmental groups, Indigenous First Nation communities and other stakeholders in its wood pellets sourcing areas.”

Looking across the sector, RBC agreed the energy transition is creating “a wealth of investable opportunities”, with EC forecasts pointing to annual capex for the sector doubling to €110bn across this decade as electricity demand increases by around 50-100% on the back of increased electrification.

But renewable growth is “less valuable in a rising rate environment” as rising yields impact how much credit the market is willing to ascribe to future growth within renewables.

“We don’t expect negative sentiment to reverse quickly, but believe the market is now giving insufficient growth credit to certain companies such as Acciona Energia, Drax, Enel & RWE (ETR:RWE).”

Networks such as National Grid are “looking fully valued”, with premiums to RAB [regulated asset base] estimates now averaging circa 30% versus circa 10% at this time last year.

As for the political spotlight, they said: “The rapid increase in European power prices, largely driven by tightness in global gas markets, remains a dominant feature of the sector. While there are clear positives for those with merchant generation that can contract into higher prices there has also been a ratcheting up of political scrutiny and the risk of intervention is high across Europe.”

The ESG attractions of the sector remain self-evident, RBC said, with ESG ownership expected to “level up” as traditional laggards transform business models, with ESG considerations now “defining” the utilities sector both from an ownership and capital investment standpoint.

“A key focus for power systems across Europe is to decarbonise, and the associated investments will no doubt dominate the utility investment landscape across the decade. We believe there is also pressure from investors to decarbonise as utilities now compete for ESG fund ownership,” the analysts said.

Read More: National Grid PLC downgraded by RBC but Drax and SSE targets upped

2022-01-25 10:10:00

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