A golden age of growth for this defensive sector

Buy ratings on SSE (LSE:SSE), National Grid (LSE:NG.), United Utilities Group Class A (LSE:UU.) and Pennon Group (LSE:PNN) have been retained by a City bank after it said the UK utility sector is “arguably entering a golden age of growth”.

Deutsche Bank said the outlook for strong - and in some cases rapid - earnings per share (EPS) growth came with companies trading at modest to large discounts to the European utilities sector.

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It noted that SSE and United were looking very cheap on multiples of 9.4 times and 10.5 times forecast 2028-29 earnings, compared with the sector on 11.5 times and Europe’s 12.5 times.

The bank lifted its price target on National Grid by 100p to 1,250p, Pennon by 20p to 600p, SSE by 150p to 2,500p and left United at 1,300p. Severn Trent (LSE:SVT) is a Hold with 2,950p target price.

The report said that the sector’s growth should be highly visible and low risk, given that price controls are now locked in. However, the bank added that some investors may still be feeling uneasy due to a fraying of the political consensus on net zero.

All the UK utilities in the bank’s coverage are forecast to grow EPS by at least mid-single digits on an annual basis over the next few years.

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This reflects the fact that UK water companies have visibility on their price controls until 2029-30, potentially starting off a new investment mega-cycle. The framework for electricity transmission is also now set until 2030-31.

Deutsche Bank said this position underpinned its outlook for rapid growth in the sector’s regulated asset base (RAB) and in earnings growth, potentially with upside to estimates based on its current conservative forecasts.

It highlights the fact that water companies are trading at undemanding premiums to RAB, with United Utilities an 8% premium and Pennon only 3% compared to the pan-European network utility average of over 20%. “This represents a value opportunity in our view.”

The bank added: “The UK utility sector offers a mix of value and premium growth. The UK waters fall into the value bucket, National Grid into the premium growth bucket, and SSE in the middle.”

Deutsche Bank said the focus for renewables-led SSE will be on delivery, with the company arguing that its transmission business is top performing.

It adds that National Grid’s new CEO Zoe Yujnovich may present an updated business plan at full-year results in May, with the potential to reiterate the company’s 6-8% EPS compound growth target but from the higher base year of 2025-26.

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The arrival of Pennon’s new CEO Keith Haslett later this year is also seen as an important step for investors to regain confidence, the bank adds.

Deutsche Bank also examined how UK utilities may react to changes in the current government ministerial line-up and aftermath of the 2029 general election.

For SSE, a continuation of current government policy could see EPS  approaching 300p a share by the early 2030s compared with 160.9p in 2024-25.

This compares to the bank’s negative EPS scenario when it drops down towards 200p, as new government policies are implemented after the 2029 election.

For National Grid, EPS growth drops to low single-digit percentages after the election under the negative EPS case, versus mid-single digits under the positive EPS case.