Broker snap: Uncertainty persists in the energy sector, says Nomura

20th Mar 2012 10:17

Nomura has highlighted National Grid and United Utilities as its key picks in the UK utilities sector, but has warned that uncertainties still remain given the current climate and regulatory intervention."Energy continues to be a contentious issue in UK politics - the economic downturn, combined with a projected rise in energy costs, means that returns through the energy value chain are an easy target for politicians," the broker said.Nomura said that the upcoming budget (tomorrow) could also deliver another surprise on the level of the carbon tax applicable from April 2014 onwards. It did also highlight the potential for positive news on North Sea gas assets. These factors, including possible intervention by Ofgem in energy supply and unknown details about the UK's Electricity Market Reform, have a created an "uncertain investment environment" for UK utilities; however concerns are higher about Continental Europe, the broker said."Given political uncertainty, anaemic fundamentals and negative real yields, we prefer the UK regulated utilities, which offer stable, inflation-indexed returns."Nomura has labelled National Grid as its top 'buy' pick within UK utilities as it offers "growth opportunity in UK transmission and screens well on relative value." Within the UK water sector, the top 'buy' pick is United Utilities, which it says offers 13% equity upside potential and a competitive yield. Drax remains the broker's top 'reduce' pick as the stock is pricing in an "optimistic scenario on biomass".As part of Nomura report, it made the following ratings changes:Centrica: target raised from 340p to 350p, neutral rating unchanged. Drax: target raised from 480p to 485p, reduce rating kept. National Grid: target raised from 700p to 705p, buy rating kept. Pennon: downgraded from buy to neutral, target lifted from 1,590p to 1,640p. Severn Trent: downgraded from buy to neutral, target lifted from 1,590p to 1,640p. SSE: reduce rating and 1,405p target maintained.United Utilities: upgraded from neutral to buy, target raised from 625p to 695p.BC