United Utilities Group PLC (LON:UU.) has been double upgraded to ‘buy’ from ‘underperform’ and had its target price hiked to 1,100p from 660p as new regulations from the UK water regulator Ofwat were deemed ‘better than expected’ by analysts at Jefferies.
In a note on Tuesday, the broker said the updated regulatory landscape, outlined in December, meant the FTSE 100 group was likely to see an 8% ‘stepdown’ in earnings per share for its 2021 financial year, as opposed to their previous estimates of a 31% decline.
However, the changes will affect the large dividend payouts of the utility firms, with Ofwat introducing a cap on shareholder return to allow more affordable bills for customers and enough capital to deal with physical risks.
Despite this restriction, and in addition to the “high political and regulatory clarity”, Jefferies said the firm could see potential upside from mergers & acquisitions, although visibility on this was limited.
As a result of these factors, Jefferies concluded that the current discount to United’s valuation was “too steep” and that it now compared favourably to its peers.
The company wasn’t the only one to receive upgrades from the broker, with fellow utility firm Severn Trent PLC (LON:SVT) having its target price raised to 2,320p from 1,920p, while Pennon Group PLC (LON:PNN) saw its target price hiked to 1,090p from 740p, though ratings for both were maintained at 'hold'.
Shares in United Utilities were 2.2% higher at 1,010p in mid-morning trading, while Severn Trent rose 1.6% to 2,601p and Pennon was up 1.4% at 1,131.5p.