- Utilities set to outperform on the back of increased capex and lower rates.
- RWE’s small valuation premium not reflective of superior earnings growth.
- 6m 110% IV attractive at 1YPc6 to add delta to the name
Reiterating our latest equity strategy tactical allocation to European Utilities, Utilities are entering a new investment cycle, fueled by the surge in demand from AI data centres, electrification trends, and constraints in connecting new power generation. As the US approaches a potential rate-cutting cycle, Utilities are regaining attention due to their sensitivity to financing costs. Higher capital investments and lower interest rates are poised to boost margins and drive valuation growth for the sector.
Although European Utilities have posted a strong YtD performance (12%) vs. the SXXP (8.8%), over 1YR the sector still lags the European market (SX6P +5.2% vs. SXXP +9%), despite its robust earnings growth and superior dividend yield, while also trading at a valuation discount to both the SXXP and US Utilities (Fig. 6).
Looking at single names, we revisit our February idea on RWE and believe the name could retest its ATH (Fig. 2), given 1) only a slight P/E premium to the sector despite more than double the earnings growth (Figs. 4-5); 2) a 25% discount to its long-term PB, despite EUR13bn committed to investments, which is expected to lift capacity by 30% and add EUR1bn+ in EBITDA by 2027; 3) the UK renewable auction and German gas plant auctions expected to conclude by year-end; 4) it is largely insulated from US tariff and policy risks; and 5) it will benefit from a market rotation to defensives due to rising growth uncertainty.
With 6m 110% IV attractive at 1YPc6 (Fig.7), we propose Long Mar26 40 Calls costing 2.8% of underlying (Spot ref 35.8, Fut ref 36.2).