Global Utilities: LatAm And Asia Growing Fastest, US Trading At Highest PEs, Japan At Tightest Yields

Global utilities valuationsGlobal utilities valuations

A recent report by Citi attempts to contrast utility valuations globally and highlight key investment opportunities. Summarizing, Asian and LatAm utilities , while growing fastest at 14 – 16% , trade at dividend yields of 3.5% and 5.3% reflecting risks and a higher cost of capital. Japanese, US and European utilities have dividend yields of 2.4%, 3.5% and 5.5% consistent with their growth profiles of 7.0%, 6.0% and 2.7% , respectively.

Regarding US market, it is trading at full value given low rates and credible growth in the 6% range. Entergy Corporation, Exelon Corporation are top picks chosen by Citi. Furthermore, electric utilities continue to trade at robust 2018 and 2019 PE multiples of 19.5x and 18.3 x, respectively. Median rate base growth is near 6% for the next 3-5 years while load growth is in the 0-1% range. Analysts explain:

We think valuations are relatively full but are supported by low interest rates and significant investment opportunities . Near term sector drivers include regulatory support for baseload generation (Coal, Nuclear) and tax reform. Entergy and Exelon are well positioned to benefit from these drivers . Duke Energy and Southern Compan are Sell rated.

In Europe, the sector is overvalued with Iberdrola, Trinity Industries and National Grid as top picks. Trading at 15.5X 2019E PE Citi believe that European utilities are “overvalued” as sharp price do not discount the poor long term growth outlook hampered by declining regulated returns and increased renewable penetration.

Poor value creative growth opportunities continue to limit capex, supporting cash flow and dividends to the expense of long term growth. In a low rate environment solid yields are supporting valuation above what would be justified by fundamentals.

Following Asia, but excluding Japanese market, the region’s utilities are trading at discounted value. China Gas, China Resources Gas, Be Water, SIIC, China Everbright International , VPower and Korea Electric Power Corporation seen as top picks.  According to CitiChina gas, water and waste treatment utilities trade at 12x 2018E PE.

We think they look attractive as estimated EPS growth is over 15% CAGR in 2016 -19 for these sectors boosted by energy mix improving and pollution reduction policies. China electricity utilities trade at around estimated 10x 2018 PE for decelerated EPS growth amid power oversupply among which we prefer wind over coal and nuclear supported by government policy.

Within Japan, experts rate Kyushu Electric, Shikoku Electric, and Hokkaido Electric Buy. They believe they are valued on the basis of 3% –4% long -term yields with some risk premium after the Great East Japan Earthquake of 2011.

Kyushu Electric and Shikoku Electric have already restarted some nuclear power plants, and we expect share prices to be driven by expected DPS hikes to ¥50. For Gas utilities, we think valuations could be dampened by concern over weakened cash generation capabilities owing to stiffer competition in the gas business owing to the advance of liberalization.

Lastly, in the LatAm markets top picks are Taesa, Companhia de Transmissão de Energía Elétrica Paulista and Energisa. These utilities are trading at low average 7.6x P/E on 1) tough hydrology (Brazil, Chile), 2) challenging long-term power prices (Chile) and 3) regulated return update (Brazil).

We favor transcos Taesa and CTEEP (power demand neutral, enjoying capacity -like rev enue scheme) and disco Energisa (superior cost efficiency and above -peer rate – base -and -volume growth). We are neutral water utilities given lack of short -term catalysts and rich valuations post rate cases