Broker tips: National Grid, Intertek, Pan African Resources
By Iain Gilbert
Date: Thursday 30 Jun 2022
(Sharecast News) - Analysts at Jefferies downgraded utility company National Grid from 'buy' to 'hold' on Thursday, stating pressures on regulated returns and rising real yields both presented headwinds for the group.
Jefferies said the relative safety of National Grid's regulated networks had been a key driver of its stock outperformance amid macro-volatility over the past twelve months.
However, the broker now expects affordability-driven regulatory scrutiny, rising real yields, and a lack of balance sheet headroom to curtail further share price upside going forward.
"We see risk rising in the utilities sector as it strives to find the balance between investment and consumer affordability crisis. We estimate that utility bills as a proportion of disposable income is on track to be the highest (~10%) it's been since the 1970s. This is a challenging backdrop for NG given circa 55% of its regulated asset base will go through a tariff review over the next two years. Just yesterday, UK regulator Ofgem released their draft determination for electricity distribution grids (~20% of NG's asset base), cutting returns from 4.4% to 3.26% (CPIH basis) in a bid to reduce domestic bills," noted Jefferies.
The analysts also noted that with recent rate hikes by central banks in both the UK and the US, real rates were now on the rise, which they see as a headwind for National Grid's long-duration assets.
"We have undertaken a broad refresh of our model, updating it for recent results, scope changes and mark-to-market effects. Overall, our price target of 1070p is ~1% higher than previous PT. In terms of FY23-26 EPS, our forecasts are -2.4%/+3.7%/+2.7%/+1.4% relative to Visible Alpha consensus. The stock currently trades on an EV/RCV of ~1.4x which is in line with its five-year average. We estimate NG's FY23/24 P/E to be 14.4x, which compares with the utility sector P/E of 16.8x and NG's 3-year average P/E of 15.0x. NG's FY23/24 D/Y is in line with sector average at 5%."
JPMorgan Cazenove downgraded Intertek on Thursday to 'neutral' from 'overweight' as it took a look at the testing, inspection and certification sector.
The bank said it had been 'overweight' on the stock given its attractive margins and return on capital employed, as it had the most post-Covid-catch-up potential and the highest exposure to oil and gas tailwinds, especially in North America.
"We retain circa 20% upside to our target price, but we move to neutral given that, like for SGS and Bureau Veritas, the company will face more demanding H2 consensus expectations," it said.
However, JPM cut its price target on Intertek to 5,300.0p from 6,000.0p as it made cuts to H1 estimates across the sector reflecting Shanghai lockdowns as well as some FY margin cuts.
Analysts at Berenberg slightly raised their target price on precious metals group Pan African Resources from 28.0p to 33.0p on Thursday following "positive" results from a definitive feasibility study on the Mogale part of its Mintails project in South Africa.
Pan African Resources provided an update on Mogale, stating the study estimated capex of $161.3m would be required for a project that would produce 50,000 ounces of gold per year over a project life of 13 years, with average all-in sustaining costs of $914 per ounce.
The study also revealed that, in aggregate, the Mogale project hosts 123.6 megatons at 0.29 grams of gold per tone to host 1.14m ounces. If the Mintails Soweto Cluster was also added, then production could be increased from 13 to 21 years, with production of 54,000 ounces in years 14-20.
Berenberg, which reiterated its 'buy' rating on the stock, noted that while tailings reprocessing operations "lack the exploration potential of mines", it said they have low operating risk and were similar to Pan African's existing Elikhulu hydromining operation, with a cyanidation plant with a capacity of 800,000 tonnes per month, which could be expanded to 900,000.
"Production is guided to increase to 215,000 oz in FY 2022/23 and to 220,000 oz in FY 2023/24. Our forecasts are in line with this and we expect AISC of $1,100/oz and $1,085/oz, respectively. There are near-term headwinds to production if the South African power utility, Eskom, introduces power cuts following an increasingly acrimonious standoff with unions, which could result in power cuts for up to six hours a day," said the analysts.
Reporting by Iain Gilbert and Michele Maatouk at Sharecast.com
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