Broker snap: Market overly cautious on SSE and Shanks, says Credit Suisse

18th Oct 2013 09:25

Credit Suisse has labelled SSE and Shanks as buying opportunities, saying that the market is overly cautious about these utility providers.Proposals by the Labour Party to freeze tariffs may have increased political risk perceptions in the industry, but this could be mitigated by reduced spend, Credit Suisse reckons."We think the industry and government could cut or eliminate the c£2bn per annum cost of environmental spend. This could prevent price rises for two years and reduce the debate every time prices rise," the bank said.Meanwhile, the first capacity auction, scheduled for late-2014, could provide some upside for companies. "We expect the clearing price will be c£25-50/KW-year (real, 2012), making generation upside all the more likely."SSE, rated 'outperform', is the bank's top pick in the utilities sector "given a broad spread of growth prospects and power price exposure". Shanks ('outperform') is its second favourite on its growth and restructuring potential, while National Grid is also rated 'outperform'.Despite staying cautious on the UK water sector due to concerns over low returns, Credit Suisse raised its rating for water company United Utilities from 'underperform' to 'neutral', saying that the stock has lagged and now offers just 2% total return downside to the target price of 660p. The target for Severn Trent ('neutral') has been lifted from 1,530p to 1,580p, assuming an outperformance on equity returns over 2015 to 2020.In contrast, the bank also highlighted downside on "expensive stocks where we believe the market is overlooking risks". These include Centrica and Pennon, both rated 'underperform'. "Our least-preferred stocks have little organic growth, such as Centrica (target price: 320p), or exposure to areas of high pricing risk, such as merchant waste incineration at Pennon (target price: 610p)."BC