SSE and Centrica rally on JPMorgan upgrades

Utilities Centrica and SSE were among the top performers on the FTSE on Wednesday morning after JPMorgan Cazenove upgraded its ratings on the stocks.

The bank said UK merchant utilities have been buffeted in recent years by a number of headwinds, with energy consumption down, structural oversupply driving a collapse in commodity-based earnings, and interventionist regulation and policy settings muddying the waters.

But the bank reckoned the cycle was turning.

“The CMA’s energy markets review will imminently conclude, reducing regulatory risk; generation markets look set to tighten and a proposal has been tabled to repair the capacity market.

“Underlying structural risks undoubtedly remain, but we see constructive evidence of earnings stabilisation.”

As a result, it lifted SSE to ‘overweight’ from ‘underweight’ and upped the price target to 1,550p from 1,280p. The bank also upgraded Centrica, to ‘neutral’ from ‘underweight’, keeping the price target at 230p.

JPM said it prefers SSE’s “defensive, cash-generative business mix”, which underpins a sustainable cash-covered RPI-linked 6.3% yield.

“With energy supply risks receding, support for gas-fired generation in the works and spark spreads improving we see potential upside to our 15% total return expectations,” it said.

On Centrica, it said that if commodities continue to recover, its significant operating leverage presents upside risk to the bank’s current estimates.

JPM remained ‘neutral’ on Drax but cut the price target to 260p from 370p, highlighting uncertainty facing UK coal-fired generation in the current political and commodities environment.

At 1113 GMT, SSE shares were up 2% to 1,464p, Centrica was up 1.3% to 228p and Drax was up 0.9% to 274.20p.