Political risk prompts Brewin Dolphin downgrade of UK utilities
The UK’s utilities sector was given another blow today with a downgrade from Brewin Dolphin to underweight.
The researchers are also downgrading their recommendations on the two FTSE 100 energy suppliers Centrica and SSE to "hold".
The downgrades were partially triggered by energy secretary Ed Davey writing to the regulators this week, calling for the breakup of any energy supplier who is found to have “monopoly power to the detriment of the consumer”.
“This means the energy supply industry faces increased political intervention whatever the outcome of the general election; we had previously only been concerned about the impact of a price freeze in the event of a Labour victory,” said Elaine Coverley, head of equity research at Brewin Dolphin.
Labour leader Ed Miliband has vowed to freeze energy bills until 2017 if elected next year.
Political scrutiny increases risk and uncertainty for shareholders, which reduces the likelihood of investment in the UK energy market, which in turn increases the risk of gas and electricity shortages, said the analysis.
Water companies are not exempt – while their price hikes tend to be below inflation (with a notable exception of London supplier Thames Water), the timing of the latest price review unfortunately coincides with the ongoing debate into the cost of living.
In January, regulator Ofwat put pressure on water companies to accept a lower rate of return on investment during the 2015 to 2020 price cycle.
This could lead to no dividend growth going forward, Coverley warns.
But Coverley is positive on the prospect of M&A in the water sector: “Infrastructure and sovereign wealth funds’ desire for UK stable regulatory assets continues and has provided support for Severn Trent’s shares in recent weeks, in the face of poor news flow from the regulator.”