Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Rachel Winter. She is Investment Director at Killik & Co. Hello and Happy New year.
Rachel Winter: Happy New Year, Holly.
Black: So, maybe it's because it's freezing outside and the heating is cranked up to 11 in my house, but we're starting our first 3 stock picks of 2021 with a bit of an energy flavour. So, where would you like to start?
Winter: We are. So, we're starting to look at renewable power. After the Democrats gained an effective majority in the Senate over in the US, we do expect the US government to borrow more and to spend that money on infrastructure, particularly renewable infrastructure. And we do tend to find that where America leads the rest of the world tends to follow. So, we're expecting quite a big increase in spending on renewable power.
We've been looking at the different areas of the electricity market that could benefit from this, and I would define those three areas as generation, transmission which is moving that electricity across the country using the grid, and then distribution which is moving that electricity from the grid to individual homes and factories.
So, first of all, let's look at SSE, which is one of the leaders in this space, very active in the UK. SSE is involved in generation and distribution and transmission. But we particularly like it for its generation. It's become one of the biggest providers of renewable power in the UK and at the moment, it's actually the biggest provider of offshore wind and it's currently building the world's biggest offshore wind farm in the UK, which is called Dogger Bank.
Black: And I think one of people's concerns with renewable energy is that question of whether we really can produce enough energy through wind and through solar. Is it viable that we can replace traditional forms of energy in this way?
Winter: We think it is. Over the last decade, we've seen absolutely huge strides in renewable power. Potentially an issue at the moment is the fact that it's difficult to store. So, because of that, we do expect that gas will make up quite a large proportion of our electricity consumption over the next few years. But we do believe that renewables will get more and more substantial as the years go on.
Black: Okay. What's stock number two?
Winter: Stock number two is E.ON, which is a German company, very heavily involved in distribution. And these types of businesses are allowed to make a percentage return on what's called their regulated asset base and if E.ON is to get more involved in renewables, we do believe it will have to make quite big investments in its infrastructure and that will grow the size or the value of its regulated asset base and that will mean that E.ON will be allowed to make a larger return, and that should be good news for shareholders.
Black: And E.ON will be a name that's familiar to a lot of people, because it goes back decades. But I wonder how much effort is it for a company like that to overhaul its proposition from traditional forms of energy to renewable ones?
Winter: So, E.ON does have a customer facing business, and that's probably where people know the name from. That accounts for about 15% of revenues. And that means the other 85% of the business is involved in electricity distribution already. So, it's not going to be a huge change to get this company involved in renewable distribution. It will just be a case of upgrading the infrastructure that they currently have.
Black: Okay. What's our final stock?
Winter: The final stock is a French company called Engie. They are involved in generation and also distribution. But what we particularly like about them is their client facing business, which is almost like a consultancy. So, Engie works with large corporations helping them to reduce their carbon footprint and it could be things like advising them on different insulation to make their heating more efficient or it could even be installing renewable generation capacity on site. So, there's lots of different things that Engie can do and we think this will really be in demand over the next few years because most corporations are looking to reduce their carbon footprint.
Black: Now, I notice that a lot of the leaders in this field do seem to be based in Europe. Is there a reason for that?
Winter: I think Europe has always been quite far ahead in terms of renewable power. I think they did start it first, but now because there is all this concern about global warming, we are starting to see all countries around the world starting to work together to bring down the global carbon footprint. So, we think all countries are now starting to get involved in this.
Black: Rachel, thank you so much for your time. For Morningstar, I'm Holly Black.
