These shares are potential winners from global energy shortage
26th April 2022 15:29
by Graeme Evans from interactive investor
From renewables to housing efficiency and cycle power, players in many sectors are set to benefit from the energy shake-up, says our City expert.
A review of the changed energy landscape has taken investors beyond just renewables stocks to consider the potential of Halfords Group (LSE:HFD), Balfour Beatty (LSE:BBY) and Melrose Industries (LSE:MRO).
Peel Hunt’s sweep of energy-related markets since the start of the Ukraine war considers sectors and companies in its coverage where there appear to be some favourable trends, including housing and support services, industrials and even retail.
The list also features the hydrogen, renewable energy and storage companies whose role in the UK’s renewed drive for energy security has been well documented in recent weeks.
One of those stocks is alkaline fuel cell company AFC Energy (LSE:AFC), which boasts a “buy” recommendation from Peel Hunt based on a considerable target upside to 195p. Its scalable emission-free power products replace diesel generators and heavy-duty engines, with applications ranging from construction sites to off-grid power for EV charging.
Other renewable energy stocks on the list include Ceres Power Holdings (LSE:CWR), the solid oxide fuel cell company with a market capitalisation now close to £1.4 billion. The company, whose fuel cells can generate power from conventional fuels including natural gas, has partnerships with German industrial powerhouse Bosch, South Korean fuel cell leader Doosan and Chinese vehicle engineer Weichai.
Hydrogen businesses ITM Power (LSE:ITM), which has a market value of more than £2 billion, and the smaller Clean Power Hydrogen are also on Peel Hunt’s list alongside waste gasification operation Eqtec and energy storage business Invinity Energy Systems.
In the oil and gas sector, Peel Hunt says the best two “buy” stocks for favourable gas market dynamics are Serica Energy (LSE:SQZ) and IOG (LSE:IOG). The latter has a target price of 75p, having recently become the UK’s newest gas production business through its flagship Saturn Banks development in the southern North Sea.
On Serica, the broker says recent 2021 results showed the “eye-watering” level of cash currently being generated by the AIM-listed North Sea operator. Peel Hunt, which has a target price of 447p, expects significant balance sheet strengthening for some time given Serica’s gas to oil revenues split of 85% to 15%.
In the industrials sector, the broker sees valuations for several stocks being underpinned by their roles in helping the world transition away from fossil fuels to renewables.
These include Melrose Industries, which has developed a standalone business that uses GKN technology for storing hydrogen safely in specialist metal hydride powders. Peel Hunt says: “It is in its infancy at the current time, but the fact that Melrose has created a vehicle for its related interests is a clear indication of its future growth potential.”
Melrose, which the broker rates with a 300p target price, also benefits from existing margin and growth opportunities around the development of pure battery electric vehicles.
The note highlights that structural steel business Severfield (LSE:SFR) provides an entry point for exposure into the UK nuclear industry through its Harry Peers subsidiary. And there’s also mention of Morgan Advanced Materials (LSE:MGAM) after it derived 7% of its 2021 revenue of £951 million from energy, including storage and power generation from wind and solar.
Other stocks on the list include Smiths Group (LSE:SMIN), whose John Crane rotating equipment, seals, couplings and filtration systems account for about 35% of total revenues.
In housing and building materials, the drive to improve the energy performance of properties new and old is seen as benefiting stocks including SIG (LSE:SHI), Travis Perkins (LSE:TPK) and Volution Group (LSE:FAN).
Companies such as Balfour Beatty, Galliford Try Holdings (LSE:GFRD) and Kier Group (LSE:KIE) are mentioned in relation to support services, given that they are well-placed to undertake the retrofit and upgrade works needed to improve the energy efficiency of public and private sector buildings.
Higher energy prices will have an impact across retail, although Peel Hunt notes that Halfords has exposure on both sides of the equation. Petrol and other running costs mean motorists are likely to drive fewer miles, but on the flipside the broker expects the car products chain to be a longer-term winner as weaker players leave the market.
There’s also an expected surge in demand for cycling, a market dominated by Halfords. Peel Hunt, which has a 525p price target, said: “We have long believed that Halfords’ market leadership in cycling was very valuable: this is especially the case now, when it provides a useful hedge against lower miles driven.”
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