Brexit Creating Income Opportunity in Unexpected Place
Concern about PPL's exposure to the United Kingdom is overblown, and gives investors a chance at a utility with cash flow clarity.
Concern about PPL's exposure to the United Kingdom is overblown, and gives investors a chance at a utility with cash flow clarity.
Andrew Bischof: PPL is a regulated utility with three key segments residing in the U.K., Pennsylvania, and Kentucky. The international regulated delivery segment operates distribution networks providing electricity service to customers in the U.K. The domestic Pennsylvania and Kentucky utilities are involved in regulated electricity generation, transmission, and distribution.
We believe the market is overly concerned about PPL's exposure to the U.K., where we see little impact from the recent Brexit decision. The regulatory construct that sets base revenue for the forward seven years and adjusts for inflation and volumes remains. Management hasn't changed its capital investment plans, which were previously approved by U.K. regulators, leaving the unit's growth prospects unchanged. Management's conservative hedging program should help alleviate currency volatility.
PPL has attractive regulated growth opportunities that could produce 5.5% earnings growth in our five-year outlook. The company benefits from operating in constructive regulatory jurisdictions, with nearly 80% of PPL's planned capital expenditures having little or no regulatory lag. During the next five years, PPL plans to spend nearly $16 billion at its regulated utilities and on additional transmission opportunities, supporting our earnings growth estimate.
In our view PPL's valuation is attractive, trading at a 5% discount to our $36 per share fair value estimate and yielding 4.4%, well above the peer group average. Current market concerns over the U.K. offer investors an opportunity to pick up a narrow-moat utility with sound regulated utility operations with earnings and cash flow clarity.
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