A year of transition
* 2017 sector performance was strong, helped by growing commodity and power prices as well as limited interest rate
headwinds. Multiple expansion also played a role, in our view.
* 2018 could be a ’year of transition’:
(i) multiples no longer look attractive, with the sector P/E (FY+1 P/E: 14.4x) above both CS fair value (13.6x) and the 20-year average (14.0x);
(ii) earnings growth has stabilised at around 5% and we do not expect it to improve materially before 2019. However, FCF
generation continues to improve.
* Business models continue to be challenged and we would expect more companies to react to exogenous challenges by
breaking up their traditionally integrated models.
* Balance sheets seem to be much less of a concern than in the past. We expect M&A, which has resurfaced in 2017, to remain a theme in 2018, while we see some upside risk on dividends.
Heading into 2018, these are our top picks:
* Preferred stocks: Enel, Gas Natural Fenosa, Snam, Vinci
* Least preferred stocks: CEZ, EDP, Pennon, Suez
* Stocks to watch: Centrica, Engie, Uniper, United Utilities