Jersey Electricity — Strong cash generation

Jersey Electricity (JEL) is the sole supplier of electricity to the island of Jersey. The electricity business is responsible for generating around 80% of group revenues and operating profit. JEL also operates a range of other businesses including property rental, retailing and business services. The government of Jersey remains the largest shareholder, with 62% of the ordinary share capital and 86.4% of the voting rights.

JEL’s share price has performed strongly over the last year and it now stands close to its all-time high at c 500p (c 14.4x FY18e EPS). We continue to use a range of techniques to provide indicative valuations for JEL. Our valuation analysis indicates further potential upside and an average valuation of c 546p per share, versus 563p previously.

JEL recorded another solid performance in FY17. PBT before exceptional items rose by 2.5%, to £13.5m (our forecast: £13.4m), despite a c 1% decline in revenues. Due to a significant fall in capex, from £32.4m in FY16 to £15.1m in FY17, net debt reduced from £29.0m in FY16, to £21.9m in FY17 (our forecast: £27m). The better than anticipated cash generation was due to a stronger performance at the operating cash flow line. Favourable working capital movements, lower payments to the pension fund and lower tax paid, thanks to capital allowances relating to investment in the interconnectors, contributed to the better than expected performance relative to our estimates. The DPS was increased by 5%, to 14.2p, in line with our forecasts.

The energy business increased profit marginally, to £11.72m from £11.65m, despite holding prices to customers flat for another year and a 0.6% decline in units sold. The lower turnover was offset by increased imports of electricity and reduced reliance on expensive on-island, oil-fired generation. However, increased depreciation, the result of recent investment in the interconnector and an increased pension provision, limited the rise in divisional profits. The return on assets fell year-on-year, but the key five-year rolling average remains within JEL’s targeted range. Beyond the core energy division, there was a strong improvement in the performance of the retail business. Turnover in retail rose by 9.2% and operating profits increased by c 62%, to £0.7m. The property business, which ranks as the second most important contributor to group operating profits, reported broadly flat operating profits at £1.6m. Increased rental income was offset by a rise in costs, mainly related to maintenance. We estimate that JEL’s achieved five-year rolling average return remains within its target range of 6-7% (pre-tax).

This rise in profitability and improved cash flow was achieved while providing its customers with a reliable, affordable and sustainable source of electricity. In this report we examine JEL’s profitability and provision of customer service in the context of the current regulatory framework, the wider regulatory debate and the Energy Plan.

FY17 results from JEL demonstrated that the company continues to deliver attractive returns for its shareholders (5% pa increase in the DPS) and at the same time supply its customers with secure, affordable and sustainable electricity. Both customers and shareholders should continue to benefit from JEL’s significant investment over the last 10 years. While the current regulatory debate, which we analyse in more depth in the following section of the note, introduces some uncertainty, we believe JEL is operationally and financially well placed to adapt to any potential changes arising from the current debate.

JEL continues to operate on a self-regulated basis and aims to meet two self-imposed regulatory targets. JEL seeks to earn both a return of 6-7% (pre-tax) on its energy business (net of customer contributions) on a rolling five year basis and to ensure that its tariffs remain within ±10% of the EU-15 average (inclusive of all taxes).

Our analysis indicates that JEL has either met, or exceeded, its regulatory objectives. We calculate the current rolling five-year average rate of return to be c 6.3%, with below target returns in 2013 and 2014 due to a requirement to run more expensive island-based, oil-fired generation, but improved performance in the period 2015-17, thanks to the increased use of cheaper imported electricity. In the UK water sector, which is currently in the middle of its periodic review process, Ofwat’s proposed rates of return are marginally below those used by JEL. Ofwat is currently proposing a pre-tax nominal rate of return of c 5.5% for the appointed water business. However, we would caution against an over-simplistic comparison of headline rates of return. The methodology for calculating invested regulatory capital can differ significantly between industries and, in addition, the UK water sector benefits from an annual inflation-linked increase in its regulatory capital value; JEL does not.

With no tariff increases since April 2014 and a decline in value of sterling versus the euro since the Brexit vote, international comparisons show that JEL’s tariffs, despite the disadvantages associated with its status as a small island operator, are c 15% lower than the EU-15 average currently, and below the lower end of JEL’s target range of ±10%. JEL claims that its standard tariff is 14% below the UK average, although recently some of the tariffs in the UK have been increased so the discount could be larger than it is claimed.

JEL has successfully delivered on its own regulatory objectives, as well as playing a key role in significantly reducing carbon emissions on the island. However, there has been a discussion in recent months as to whether the regulatory framework should be allowed to continue in its present form.

The regulatory debate arose from initial criticism by one of the deputies in the States of Jersey (Deputy of Grouville) of JEL’s proposed extension of standby charges on embedded generation although, at present, this applies to only very few customers. Standby charges are levied on commercial customers who generate their own power but require standby power and grid services for when they are not able to generate sufficient power to cover their own needs. Criticism of the standby charge, first made last May (in particular as it related to renewable generation) then expanded into a more general discussion of JEL’s role and the current regulatory regime. Much of the criticism has been focused on the island’s failure, despite abundant renewable resources, to encourage the development of renewable electricity generation. During the course of the initial discussions in the States of Jersey, the Minister for Treasury and Resources pointed out that the standby charges were lower than those prevailing in the Isle of Man. In response to questions, the minister further opined that JEL’s tariffs were some of the lowest currently on offer in the UK, offer good value by European standards (see above) and deliver electricity with one-tenth of the carbon intensity of the UK system. The minister also suggested that, if there were a need for subsidies to encourage renewable generation, this would be a matter for the government and not for JEL.

However, in October the Deputy of Grouville lodged a series of propositions in the States of Jersey, which were subsequently amended and debated by the States of Jersey at the end of January 2018. The propositions were as follows:

In line with the recommendations of the Council of Ministers, all propositions were duly passed, with the exception of c) above.

In response to the propositions, JEL agreed to delay the imposition of the standby charge until 1 May 2018, by which time it is expected that the independent body appointed to review the level of the charges (flat rate of £3.25p/month) and their implications for competition on the island will have had sufficient time to complete its report. Given the limited number of customers to which the charge will apply, the financial implications associated with the delay are inconsequential in the short term. The Minister of the Environment has committed to a review of the Electricity (Jersey) Law 1937 and work is scheduled to begin in mid-2018 (expected to continue to the end of 2019). Among other things, the review will conclude whether there is a requirement to introduce economic regulation for JEL. The Action Plan for the development of a renewable generation sector will commence once answers to part a) and b) above have been completed.

As we have noted, part c) of the propositions was ultimately withdrawn by the Deputy of Grouville after a number of concerns were raised, not least that it pre-empted the findings of the other parts of the propositions (eg review of the electricity law) and was not supported by sufficient evidence to suggest that economic regulation was a necessary step. The Council of Ministers cautioned that “economic regulation can be costly, ineffective and wide-ranging in its impacts and this is a substantial step that should only be taken if the Island’s Energy Plan (see below) aspirations can’t be achieved through an update and extension of the Law supported by appropriate policy levers”. The requirement for additional funding of CICRA, in the event of its assumption of the role of economic regulator of JEL, was also seen as problematic.

Despite agreeing to delay the implementation of the standby charges, JEL robustly defended the rationale for such charges (which cover the cost of on-island back-up generation and the financing, installation and maintenance of generation and network assets). JEL argues that if embedded renewable generation did not pay its share of these costs then the costs would have to be paid by others, perhaps not in a financial position to install renewable generation. In support of its position, JEL reiterated the warning of the CEO of Ofgem that “there was a risk that those who could afford to harvest their own energy and avoid network charges and avoid policy costs that are passed on via bills would leave a shrinking pool of less wealthy customers to shoulder the costs”. JEL also highlighted that introducing green subsidies, which are added to the bills of customers, inevitably increases the price of electricity. Specifically, JEL cited Ofgem’s calculation that customers in the UK are estimated to be paying an extra £110 pa on energy bills to finance renewable energy.

We believe that JEL’s high levels of network reliability, supply of low-carbon electricity and relatively low prices to customers mean it is well placed to withstand any regulatory changes. However, in light of this intensification of the regulatory debate, we revisit the Energy Plan 2050, published in March 2014, reviewing some of the key operational objectives and JEL’s progress towards these targets. The Energy Plan, written by the Department of the Environment in conjunction with the States of Jersey, commits Jersey to an 80% reduction in carbon emissions by 2050 (in line with the UK) and calls for the provision of “secure, affordable and sustainable energy”. JEL reflects the ambitions of the Energy Plan in its corporate strategy, which aims to “sustainably serve our community with affordable, secure and low carbon energy, today and long into the future”. It is worth prefacing our analysis of the Energy Plan by emphasising that of the projected reduction in emissions it sets out, only 4% of the required total was targeted to arise from the deployment of micro renewables in the domestic sector. The majority of savings was expected to arise from improving the energy efficiency of the housing stock, lower emissions from cars and an increase in the use of electric vehicles (EVs).

According to JEL’s customer surveys, tariffs are the single most important issue for its customers. As we have noted, JEL has kept its prices stable since April 2014 and its customer tariffs compare well to other European countries (14% below the UK standard tariff and 15% below the EU average). This provides JEL with some headroom to increase tariffs, should it be required, to reflect the decline in the value of sterling versus the euro.

JEL’s tariffs also compare favourably with other island jurisdictions such as Guernsey and the Isle of Man. JEL is exceeding its own regulatory objectives on pricing currently and during FY17 took additional steps to enhance price predictability in the future by extending its supply agreement with EDF by five years, taking it out to 2027. According to JEL, the deal includes a fixed-price component with the additional ability to fix prices on a rolling three-year basis related to a market mechanism linked to the European Energy Exchange (EEX).

Security of supply is measured by average customer minutes lost and is the second most important element of JEL’s service package, as ranked by its customers. JEL has delivered high levels of security of supply in recent years, thanks to significant investment in the network, back up generation and the expansion in the capacity of its interconnectors with France.

Exhibit 7 shows that last year JEL reported only eight customer minutes lost, compared to an average figure for the Big Six energy distributors in the UK of 74 customer minutes lost. JEL’s average number of customer minutes lost over the last five years is only 32 minutes. As we have noted, the strong performance on customer minutes lost has been underpinned by JEL’s infrastructure investment. Exhibit 8 illustrates the significant investment made by JEL in recent years including, most notably but not solely, expenditure related to the replacement and maintenance of interconnectors. In total, in the period 2008-17 JEL spent £195m, significantly more than the figure of £100-150m anticipated by JEL in 2008 for the next 10-year period. The figure is also in excess of the depreciation charged (c £86m) over the same period.

Effectively JEL assumes a one-in-eight winter peak demand and the failure of the largest single component of the system. With three interconnectors now in operation, JEL enjoys an import capacity of 190MW, almost 20% higher than peak demand of 161MW registered in 2012. The margin (capacity over peak demand) of 20%, which does not include La Collette and other on-island generating capacity, compares to an overall margin standard for the UK system of c 10%. In addition to investment in interconnector capacity, JEL has made significant investment in back-up generation and generation with ‘black start’ capability. JEL now has four 11MW Sulzer turbines at La Collette, in addition to a fifth 5.5MW ‘black start’ Sulzer generator. JEL acquired the engine in 2016 and refurbished and installed it in 2017. The ‘black start’ capability will allow JEL, in the event of system failure, to restore power to La Collette power station without the engine requiring its own supply of electricity. JEL continues to enhance the network with the construction of its £17m St Helier West substation. The site was handed over to the contractors, Engie INEO, in September 2017 and the build is expected to take about a year.

JEL contracts with EDF (in excess of 30% renewable energy in FY17) to ensure that, while there is little indigenous renewable generation, the island of Jersey derives a significant proportion of its energy requirements from renewable energy sources (UK = 29% in 2017). Total low-carbon generation, including nuclear, comprised c 93% of the total electricity supplied in FY17 (vs c 50% in the UK in 2017). JEL’s importation of nuclear and renewables electricity has allowed for a reduction in the use of oil as a feedstock for electricity generation. In the early 1990s JEL typically used c 60,000 tonnes of oil to generate electricity, whereas in recent years this has reduced to less than 5,000 tonnes. As a result of this shift, the carbon intensity of the energy supplied has fallen considerably, to 35g CO2e/kWh in 2017 (latest UK figures for 2016 show 242g/kWh versus 680g/kWh in 1990). The carbon intensity of JEL’s electricity is not only significantly below the average for the UK as a whole but considerably lower than the estimated 250g CO2e/kWh achieved by oil-fired central heating systems, the principal on-island competition to the electricity-powered heating systems offered by JEL.

In large part, due to the significant reduction in the carbon intensity of the electricity supplied by JEL, Jersey has reduced its greenhouse gas emissions by c 40% over the period 1990-2015. By way of comparison, in 2016 the UK emitted 467 megatonnes of greenhouse gases, a 42% reduction over 1990 levels. Strikingly JEL and the wider energy supply industry have been at the forefront of emissions reduction (Exhibit 9). In 1990 energy supply was responsible for 34.2% of total emissions, but by 2015 this had declined to 7%. In total energy supply reduced emissions by 88% over the period compared to a 40% reduction for the island as a whole. As a result, Jersey’s per capita emissions of greenhouse gases, at 3.56 tonnes per capita, is less than half the figure for the UK as a whole (7.61 tonnes per capita). In terms of reducing carbon emissions, the energy supply industry has clearly outperformed the most significant contributor to the islands emissions – transport – which in 2015 accounted for 45% of total island emissions. We examine the reasons for the failure of the transport sector to match the reductions of the energy sector in a later section of this report.

Despite, or maybe in part because of the significant reduction in the island’s greenhouse gas emissions (GHGs) in the power sector, on-island renewable generation has failed to flourish, despite significant growth in renewable generation elsewhere (eg the UK, where in 2016 renewable comprised c 25% of total output). According to Eurostat figures for 2015, renewables accounted for 28.8% of gross electricity consumption. EU installed capacity figures for solar and wind show that capacity has risen at a CAGR of c 20% in the period 1990-2014 and now amounts to c 22% of total installed capacity.

We believe the lack of progress with indigenous renewable schemes (either large-scale utility projects or smaller embedded micro generation) has been exacerbated, despite a buyback tariff (6.5p/kWh, broadly in line with electricity purchase costs) put in place by JEL, by the relatively high cost of renewables compared to the cost of electricity supplied by JEL and the lack of subsidies available to encourage developers. In the UK, Ofgem has emphasised that the rapid growth in renewable electricity has relied on subsidies. It estimates that the annual gross cost of carbon prices and subsidies for renewable electricity reached £7.4bn in 2016.

Despite a recent solar project being constructed in the UK without the aid of subsidies, the cost of support for low-carbon electricity is expected to grow over the next five years and Ofgem estimates that, by 2021-22, the cost of low-carbon subsidies passed onto consumers will rise to £11.8bn. However, the cost of building and operating renewable generation is falling. According to Ofgem, the middle rate provided to new solar panels under Feed-in Tariffs (FiTs) has fallen from £360-442/MWh in 2011, to between £18-19/MWh in 2017. The weighted clearing price for renewable projects under Contracts for Difference auctions of £62.62/MWh in 2017 compares to £101.85/MWh recorded in 2015. The UK also saw the opening of its first solar farm without a subsidy in 2017, although site-specific advantages suggest this is unlikely to set a precedent in the short term.

In addition to direct subsidies and carbon prices, the expense of integrating intermittent sources of generation to the network can also increase overall costs. The UK Energy Research Centre has estimated that 15% of electricity in 2016 came from intermittent sources and that the cost of integrating these new sources of electricity within the network is between £5/MWh and £10/MWh. Although Ofgem believes that the market may soon be able to provide electricity without a government framework it concludes that “given the high fixed costs and low marginal costs of most low-carbon generators, a scheme that provides certainty of revenues to investors…could still be beneficial”.

JEL believes that grid-based solar PV has interesting potential on the island and claims to be close to launching a scheme to facilitate this opportunity. JEL has also stated that it remains “committed to connecting smaller-scale generators to its network”, but that this should be done on equitable terms that allow JEL to charge for the provision of back-up power. In the absence of this ability, as we have already noted, JEL argues that customers from lower income groups who cannot afford to invest in renewable schemes would incur a greater proportion of grid costs.

We also examine JEL’s efforts to improve energy efficiency and manage demand growth, both important subsidiary components in ensuring the provision of secure affordable and sustainable electricity to its customer base.

JEL’s Powerhouse retail outlet on the island offers a range of energy-efficient washing machines and fridges that play an important role in improving energy efficiency. Also of importance in promoting energy efficiency has been JEL’s SmartSwitch programme of installing smart meters across the island. At the end of FY17 SmartSwitch meters totalled 36,000 (c 75% of all customers) vs 26,000 at the end of FY16. The programme is expected to continue in 2018 and is scheduled for completion by 2019. The introduction of the new meters has enabled JEL to introduce its first 24-hour uninterrupted heating tariff, Economy 20 Plus (E20+) by allowing it to switch over its customers to its higher general domestic rate during four peak hours of the day, which were formerly an interruption to the heating supply. In FY17 JEL also launched Smart Account, an online portal specifically designed for its customers.

The effect of JEL’s initiatives can be seen in the customer consumption figures. We calculate that in 2008 JEL’s average customer consumed 13,750kWh of electricity, while in 2017 the figure had fallen to 12,492kWh (based on average customer numbers for the year). In any one year consumption figures can be influenced by weather/temperature conditions, but a clear downward trend is discernible. Absolute figures (not on a per-customer basis) for final energy consumption (published in Energy Trends 2015), which include all forms of energy consumption, also show a decline in energy consumed (electricity comprises c 35% of the total) over the period 2011-15.

JEL’s work on tariffs and smart meters has enabled it to restrain the growth in peak demand, which has risen more slowly than overall demand growth. As a major driver of network capex, more muted growth in peak demand has enabled JEL to reduce network expenditure below the level that otherwise might have been required. Lower capex ultimately has a beneficial impact on tariffs.

In our last report on JEL we examined three potential drivers of long-term demand growth; switching from oil-fired central heating, the installation of rooftop solar and vehicle electrification. In the following section we review the progress made in each of these areas.

As well as reducing the island’s CO2 emissions, switching customers from oil-fired central heating to electric heating is perhaps the most significant potential driver of long-term demand growth for JEL. The energy solutions team, established in 2015, has put in place a range of tariffs and incentives to encourage customers to switch. In 2017 the team achieved over 170 fuel switches in the domestic sector, an important component of the additional 320 customers signed to electric heating tariffs during the year. According to JEL, the team accounted for a new load of 1.7m kWh (c 10,000kWh per customer versus our assumption of 8,000kWh/customer). Applying JEL’s average selling price per unit (13p/kWh), this amounts to extra revenue of c £0.2m. In reality, JEL’s electricity heating tariffs are lower than its average selling price, so the additional revenue would be less than the £0.2m estimated above. We calculate that if JEL were able to increase the number of electricity customers by c 250 pa (with 5% of these new customers installing solar panels), the NPV of additional revenue over the period would be worth £13.7m (45p/share).

As we have already highlighted, there has been little take-up of rooftop solar panels in Jersey, despite the success in the UK and elsewhere in Europe. We estimate that the number of systems on the island is currently less than 10. For our sensitivity analysis we assume the number of rooftop PV installations rises to 1,430 by 2030 (5kWp, load factor 12%). Assuming each installation consumes all electricity on site, we calculate the discounted value of revenue lost to be worth 14p/share to JEL over the period. This analysis does not include any potential revenue from the imposition of standby charges.

Although sales of EVs remain a relatively small part of total vehicle sales (c 1% in Europe), the global move towards electrification of vehicle fleets has gained further momentum over the last year. Both the UK and France have committed to phasing out new petrol and diesel vehicles by 2040, existing car makers have announced their intention to increase the range of electric models in the next five to six years (eg Mercedes plans to offer electric versions of all models by 2025) and new players, like Dyson, are preparing to enter the market. Large oil companies have also begun to plan for the electrification of the vehicle market, with Shell announcing the acquisition of NewMotion, a Dutch company providing charging infrastructure.

As we have written previously, the geographical dimensions of Jersey (9 x 5 miles) appear to offer favourable setting for the roll-out of vehicle electrification. However, as with renewable generation, the absence of government subsidies has meant that EVs have yet to establish a significant presence on the island. In 2016, JEL estimated that there were only c 215 EVs on the island (cars 131, other 84, all EVs 215 + 424 hybrids). At the end of 2017 the figure for pure electric vehicles had risen to 271, a year-on-year increase of 56.

JEL continues to believe that vehicle fleet electrification offers the next significant opportunity for the island to reduce CO2 emissions and this is supported by the original projections contained in the Energy Plan. JEL has made representations to the government on the need for subsidies to increase the rate of electrification, but the States of Jersey has yet to respond. In the meantime, JEL is collaborating with Jersey Post on the electrification of its vehicle fleet (a further 15 EVs in 2017), has set up an Evolve electric car club and installed electric charging points in St Helier. In 2017 JEL also acquired a further five EVs, taking its total fleet to 15.

The pace of adoption of EV technology on Jersey remains slow. Our analysis suggests that unless EV adoption accelerates, the impact of vehicle electrification on JEL’s profitability is likely to be small.

As we have noted in our previous reports, JEL hedges its currency exposure related to the purchase price of electricity (€ related) on a one- to three-year view. In certain cases JEL also hedges the cost of large capital projects (€ related). However, permanently weaker sterling versus the euro and the dollar would have a number of implications, both positive and negative, for JEL.

The most significant result of weaker sterling versus the euro (see Exhibit 6) is to increase electricity purchase costs from France. We have previously estimated that the electricity purchase costs comprise c 60% of the customer’s final bill, but we now believe that a figure of 50% would be more appropriate. A 20% increase in purchase costs as a result of a devaluation of sterling versus the euro would therefore increase the final bill by c 10% (50% x 20%). Although sterling has rallied modestly in recent months, the relatively lower levels of sterling for sustained periods post the Brexit referendum will have impacted on JEL’s electricity purchase costs and we would expect some upward revision to customer tariffs in due course to reflect this. Weaker sterling could also increase the cost of some of JEL’s capital projects. Given the lower profile for capex that we now assume (post the construction of the interconnectors with France) and as JEL moves to implement a strategy of asset optimisation, this is likely to be of less significance.

In two other areas weaker sterling has more positive implications for JEL. Weaker sterling versus the dollar, while carrying potentially negative implications for the cost of JEL’s capital projects, would also push up the cost of heating oil, raising the cost of domestic oil-fired central heating, the principal competitor to JEL’s electricity-based central heating systems. Sterling weakness versus the euro pushes up electricity purchase costs, as we have seen, but is beneficial when making international comparisons to JEL’s tariffs. As we have already noted, maintaining its tariffs ±10% of the average for the EU-15 is one of JEL’s self-imposed regulatory targets, so weaker sterling has beneficial consequences for JEL in this regard.

The Board of Directors comprises eight members: two executives and six non-executives. The executive team remained unchanged during 2017. Chris Ambler continues as CEO (since 2008) and Martin Magee remains CFO (since 2002). Geoffrey Grime, chairman and board member since 2003, also remains in post. However, with the retirement of Mike Liston (former CEO) in December 2016, Tony Taylor was appointed as a non-executive director in September 2017. Mr Taylor brings experience of the marketing and communications sector.

There has been no change to the shareholding structure (ordinary, “A” shares and preference shares) during the year. The States of Jersey continues to hold all of the ordinary shares (62% of total share capital but 86.4% of the voting rights). Ordinary shares (19m in issue) entitle holders to one vote for every 20 shares held, whereas “A” shares (11.64m in issue) entitle the holder to one vote for every 100 shares held. Of the listed shares, Huntress (CI) Nominees owns 5% of the total voting rights. JEL understands that the underlying owners of the shares are private Channel Islands-based investors.

JEL’s share price has performed strongly over the last year and it now stands close to its all-time high (c 500p). We continue to employ a range of techniques to provide indicative valuations for JEL. The average of our analysis indicates a valuation of c 546p/share versus 563p previously.

Our SOTP analysis, which does not reflect any adjustments for liquidity or minority-related issues, takes the regulatory asset base, less working capital adjustments, as its starting point. Currently, we estimate the regulated electricity assets to be in the region of £176m and assume, for the purposes of our analysis, that WACC = allowed returns. The property business is valued at balance sheet and the other businesses are valued at a multiple of 15x earnings. In total, our SOTP approach produces a valuation of 552p versus 520p previously. The uplift in valuation reflects, in large part, a lower net debt figure (+17p) and higher values for the unregulated business (+13p). If we were to assume that WACC was in fact 10% lower than the targeted return, and this return spread were to last for 10 years, in broad terms, JEL could be worth an additional c 25p.

The DCF valuation, as always, remains very sensitive to assumptions of WACC, terminal growth rates and capex levels and, as a result, is the least preferred of our approaches. Our DCF base case scenario assumes capex of c £15m pa in FY18 and c. £11m in the period 2018-25. Exhibit 14 illustrates the sensitivity of the DCF to changes in the discount and terminal growth rates. Using a WACC of 6.6% and a terminal growth rate of 2% would indicate a valuation for JEL of 501p.

Our updated analysis shows that JEL’s peers are trading on P/E multiples of 13.4x (FY1e) and 12.7x (FY2e). EV/EBITDA multiples are 10.7x (FY1e) and 10.3x (FY2e). On average, the stocks yield 5.8% (FY1e) and 6.1% (FY2e). Simply placing JEL shares on peer group average multiples would indicate a share price of 528p. As we have stated previously, the yield valuation does not include the additional yield that may be available to Channel Island-domiciled shareholders arising from favourable tax treatment of the dividend. However, the analysis does reflect a yield based on normalised sector dividend cover.