SSE PLC (LON;SSE) is the best-placed of the UK utilities to deal with a bout of inflation according to analysts at Citigroup.
Power generator SSE has the least inflation-linked debt and should therefore see more of the inflation benefit from revenues dropping through to the bottom line, said the US bank.
A permanent 1% increase in inflation would theoretically increase its valuation by 2-3% reflecting higher RAB (regulated business) growth, Citi added.
The bank is still not that enthused about SSE, saying it cannot grasp the merit of the strategy of selling high return assets to maintain a dividend and keep low return ones, but in the absence of any obvious negative catalyst, it has been upgraded to hold with a 1,554p price target.
Citi added that it has also upgraded Drax PLC (LON:DRX) to buy following the recent 20% rally in UK power prices. The bank’s share price target for the generator goes up by 28% to 505p.
Centrica PLC (LON:CNA) is also a buy UK though it is high risk, while Citi’s favourite utilities remain National Grid PLC (LON:NG.) and Pennon PLC (LON:PNN).
SSE shed 1.5% to 1,511.5p.