Broker tips: Power companies, Sainsbury, Aveva

18th Mar 2011 13:07

The unfolding events in Japan are likely to have shifted the public's perception of nuclear energy, but it is still very early to say exactly how this will affect the UK power sector, according to broker Matrix."We have analysed a number of speculative global policy responses to show the impact on the gas market in general and the liquefied natural gas (LNG) market in particular," says analyst Adam Forsyth.The broker notes that the closed Japanese and German nuclear plants account for 5% of global-traded LNG, and the closure of all plants in these countries would equal 13% and 6%, respectively. Furthermore, if all reactors in the world situated in earthquake zones were shut down (including those "in a country where public opinion is likely to influence policy"), then the lost global capacity would be more than 25%."While many governments may have little practical alternative but to stick with nuclear for the time being, at the very least, we think it safe to say that the long-term policy impact is unlikely to lead to lower gas prices," says Forsyth. Matrix says that higher gas and electricity prices would be most obviously positive for Drax, and labels the power provider a 'buy' with a target price (TP) of 463p.Integrated supply companies Centrica and Scottish & Southern Energy (SSE) "both have a degree of hedging", but the broker puts the former company on 'hold' with a TP of 328p, while the latter is given a 'buy' rating and TP of 1,325p. "SSE's more flexible hydro and pumped-storage assets could benefit if UK nuclear capacity were to come under threat," says Forsyth.International Power, the electricity generator, has less exposure to merchant plants "following its merger with the assets of GdF Suez, but could potentially gain in the longer term as a developer of non-nuclear power assets." A 'hold' is given, along with a TP of 328p.Not to be outdone, Northland Capital Partners has done its own assessment on the commercial impact of the Japanese earthquake."Following China's statement that it will review safety of existing nuclear facilities and temporarily suspend approval of new nuclear plants pending further safety reviews, the general consensus seems to be that the nuclear industry will suffer a setback albeit temporary," the broker notes. The tragedy in Japan has led to a demand for some clean tech stocks, such as Germany's Solarworld and Conergy. "Wind Turbine gearbox maker Hansen Transmissions has also rallied some 20% from its recent lows. ITM has also rallied some 23% in the last couple of days," Northland added.Northland's view is that none of the alternative renewable sources of energy are ready to pick up the slack from nuclear power. "Fossil fuels, as heretical as it may seem to say, remain the only viable short term alternative," the broker reckons. "Gas is currently the cleanest and cheapest viable alternative. Natural gas prices have climbed in recent days as has the price of LNG Carrier fleet owner Golar. Closer to home, Hamworthy is a potential beneficiary," Northland suggests. "Biomass is also a potential alternative, which is suitable for base load but could not replace Nuclear on the same scale. Helius Energy is developing Biomass power station projects in the UK. Its first project CoRDe is almost ready to begin construction and we expect an announcement that financial close has been agreed in the next few weeks. We believe this should be a revaluation event for the stock," Northland concluded.Although supermarket giant Sainsbury is still leading the pack in terms of sales growth, Nomura lowers its forecasts, saying that the 2011 calendar year is increasingly likely to be a low growth period for the UK grocery market.The Japanese broker expects the group to post a fourth quarter like-for-like (LfL) growth (ex-fuel, VAT-inclusive) of 1.5%, from a 3.6% increase in the third, "reflecting a low growth grocery market since Christmas, and the travails of the UK consumer," says analyst Nick Coulter.Even though the impact of new space on sales is estimated to tick up to 2.5% for the quarter, full-year LfL forecasts are lowered from 3% to 2.3%, and pre-tax profit is cut by £5m to £665m. Sainsbury's growth rates have moderated but still remain ahead of its peers, says Nomura. However, with lower growth to resonate down to slower LfL improvement in the current year and the next, the Japanese broker keeps its 'neutral' rating and cuts the target price from 380p to 365p.Panmure Gordon stays on the fence at Aveva as the situation in Japan deteriorates, but notes that any further weakness in the shares should create a buying opportunity.The developer of engineering data and design information technology systems has seen its share price fall around 8% in the last week as investors fret about the outlook for nuclear new build in the wake of the tragic events in Japan.However, the group's nuclear operations account for less than 5% of its revenue, around £7.4m, and its Japanese business in that sector is only equal to around £3m of that, according to the broker. "The globe is addicted to power", says analyst George O'Connor, who notes that for the medium term, nuclear build restrictions should get more stringent, fuelling demand for AvevaNet, the group's project lifecycle management system.The broker sticks with current estimates despite investors' Japanese concerns. The target price is 1,579p.