Shares in water and electricity giant United Utilities PLC (LON:UU.) were downgraded by HSBC with its analysts citing “downward inflationary pressure” along with regulatory and political risks for the change in call.
The bank moved to ‘hold’ from ‘buy’ ahead of results next week and trimmed its price target to 900p from £10.
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At 12.20pm, the stock was changing hands for 801p, down 33.5p or 4% in the wake of HSBC’s updated analysis.
It expects the company’s earnings line to be hit by inflationary pressures as its indexed linked debt means the cost of borrowing rises along with the retail prices.
Political risk
UU may also be at risk from a fragile government that may look to launch a vote-grabbing assault on the privately owned utilities, the bank added.
Regulator Ofwat’s next pricing assessment may also pose a threat: “UU is relying on financial prudency and outperformance to give it headroom into what is likely to be a challenging review.
“In Ofwat’s latest financial resilience report, UU does not seem to have significantly more financial headroom than its listed peers, in our view.
“Given its small incentive rewards to be taken at the end of the regulatory period we have less visibility than we have for other companies who are taking them in period.”