18th Nov 2022 18:40
(Alliance News) - British Gas owner Centrica PLC is well-placed for success, though Drax Group PLC "is not out of the woods yet", analysts at Citi said after UK Chancellor Jeremy Hunt's autumn statement put the spotlight on electricity generators.
Among a slew of tax rises, Hunt introduced a 45% levy on electricity generators, targeting the excess profits that renewable and nuclear operators have made since Russia's invasion of Ukraine rocked energy markets.
The "increased clarity" which followed the chancellor's speech has altered the business landscape for Centrica, Drax and SSE PLC, Citi said.
Citi reiterated its 'buy' rating for Centrica, its "preferred UK utility", arguing the British Gas owner has "increased visibility" all round.
Centrica can benefit from "strong profits and cash generation in the near term" from its commodity exposed businesses. But its Energy Marketing & Trading teach-in could also potentially provide "further visibility that demonstrate(s) the sustainability of profits."
Looking to 2024 and beyond, Citi pointed out that the return to a competitive retail market in a more stringent operating environment with less competitors could provide "retail margin upside".
A number of competitors collapsed over the past year as soaring wholesale gas and power prices tipped smaller firms over the edge. Centrica snapped up many of the remaining customers.
Citi increased its 12-month price target for the stock to 110 pence. Centrica shares closed up 1.8% at 93.39p each on Friday.
In contrast, Drax Group, Citi said, was "not yet out of the woods", although it maintained its 'neutral' rating.
"Debate around [environmental, social, and corporate governance] credentials of biomass is likely to resurface, which could continue to be a headwind for the shares," the analysts said.
Biomass - an energy source derived from organic matter - is generally considered a renewable energy. However, this has been questioned because it relies on new plants absorbing the same amount of carbon dioxide that is released when the organic matter in biomass is consumed.
Citi said the share price already reflects "the forward curves to 2024, a long-term GBP75 per MWh power price, a profitable and growing biomass supply business, two units of UK [bioenergy with carbon capture and storages] and growth in hydro capacity."
It updated the 12-month price target for the Yorkshire-based power generation firm was 598p, up from 537p. Drax shares closed 2.7% up at 617.46p each in London on Friday.
Citibank also maintained a 'neutral' rating for SSE.
"We believe the equity is fairly valued given its strategic outlook and low quality of 1H results," Citi analysts said.
The power utility posted a pretax loss of GBP511.0 million, versus a profit of GBP1.69 billion a year prior. This came as costs rocketed to GBP6.13 billion from GBP1.19 billion the previous year.
Citibank said that the near-term growth in renewables remains intact and network disposals should deliver a "decent premium" to SSE's regulatory asset base.
However, the scale of value creation from renewable investments remains "unclear". Citibank said this was due to "the higher capex and also higher cost of capital."
It also noted the "increasingly questionable return spreads" in offshore wind around the world.
"With dividend yield of around 3.5% in FY23/24 (post rebase) and likely a flat earnings profile year-on-year, we see limited appeal in the context of a higher rate environment and continue to rate the shares as neutral," the investment bank concluded.
Its 12-month price target was raised to 1,664p from 1,486p. Shares in SSE closed 2.3% higher at 1,707.24p each.
By Chris Dorrell; [email protected]
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