Chart 80: Stocks mostly trade above ex-pipeline value Chart 81: Growth from new products - $138bn launching 16-20E Peak Pipelines are free for most stocks unrisk-adjusted sales potential (USDm) of product launchs by year 25% 9s: 50,000 1% 45,000 1S 40,000 5% 1% 35,000 30,000 j 5% 5 | ca 25,000 -15% -10% 4% 46% 16 20,000 25% “0h 15,000 25% 10,000 So 5,000 > @ cN @ © © st g ; es e2tese2reHtreee se m Premium/(Discount) to ex pipeline DCF SX Rk RK KR KRKRKRSSESESEAQ N N N N N Source: BofA Merrill Lynch Global Research 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 Chart 83: DPS more secure now but the relative yield is at 2yr highs 1.10 170 1.05 1.60 —— Utilities 1.00 1.50 | 0.95 1.40 0.90 1.30 - é 1.20 0.85