(Bloomberg) -- U.K. utilities offer the possibility of higher returns if they appeal against the latest framework proposed by the energy regulator, Barclays said in a note that also upgraded water company Pennon Group Plc.
All regulated utilities are likely to appeal Ofgem's RIIO-2 review by a March 3 deadline, analyst Dominic Nash said in a note. The Competition and Markets Authority is meanwhile set to rule by mid-month on appeals by four firms against a determination from water regulator Ofwat, he said.
Pennon was raised to overweight from equal weight. That reflects the fact that the owner of South West Water has been trading at a 6% premium to its regulatory asset base, according to the note -- lower than peers United Utilities Group Plc and Severn Trent Plc despite sector-leading on returns.
Pennon was de-rated because of “optically high multiples” and its exit from the FTSE 100 Index, Nash said. But if the equivalent of 570 pence a share in cash was removed from the balance sheet it would trade at the attractive price to earnings ratio multiple of about 10 times, with a 7% dividend yield.
Barclays added that there is limited impact from bond yields on the U.K. utilities sector, with a positive inflation impact.
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