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Chart 80: Stocks mostly trade above ex-pipeline value Pipelines are free for most stocks Chart 81: Growth from new products - $138bn launching 16-20E Peak unrisk-adjusted sales potential (USDm) of product launchs by year 50,000 45,000 40,000 35,000 30,000 29,000 20,000 15,000 10,000 5,000 0 29% 15% 5% -5% -15% 14% 25% he 18 -35% oOo DD Qo 2 oOo 2 N NN Source: BofA Merrill Lynch Global Research mPremium/(Discount) to ex pipeline DCF Source: BofA Merrill Lynch Global Research Overweight Utilities The Utilities sector has suffered badly from the back up in bond yields. However, fundamentals for the sector are actually improving relative to recent history. The sector is the biggest direct beneficiary of corporate QE in the UK and Euro are (more than half of the sector are eligible for the ECB’s Corporate Sector Purchase Program) meaning it can gain more than most other sectors from potential refinancing savings. This cushions any effect on debt costs from higher bond yields as corporate bond yields are still very low. Earnings and cash flow are improving. The bottoming out of the commodity cycle has supported a turn to the upside for power prices. This has helped earning to trough and analyst revisions have been positive throughout the last few months of underperformance. Balance sheets and dividends in most cases now also look sustainable. Valuation multiples for the Utilities sector are attractive relative to history and compared to other Defensives. EV/EBITDA for the sector sits at 7.3x on Bloomberg estimates. That is a 20% discount to the market and is near 10-year lows on a relative basis. With dividends more secure the relative DY becomes more attractive at 2-year highs. Chart 82: Utilities EV / EBITDA relative to market near10-year lows 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Chart 83: DPS more secure now but the relative yield is at 2yr highs 1.10 1.70 1.05 1.60 a= | Jtilities 1.00 1.50 0.95 1.40 0.90 aD 1.20 0.85 1.10 0.80 4.00 0.75 0.90 FY1 EV/EBITDA relative 0.70 0.80 07/05 07/07 07/09 07/11 07/13 07/15 02/04 02/06 02/08 Source: BofA Merrill Lynch Global Research, Bloomberg —— Utility 12m fwd DY relative 02/10 02/12 02/14 02/16 Source: BofA Merrill Lynch Global Research, Datastream, IBES Bankof America Merrill Lynch European Equity Strategy |O1 December 2016 35 HOUSE_OVERSIGHT_014494