On Thursday, BofA Securities issued an upgrade for United Utilities (OTC:UUGRY) Group PLC (UU:LN) (OTC: UUGRY) stock, shifting the rating from Neutral to Buy and increasing the price target to £12.45, up from the previous £10.50.
The firm believes that the company is poised for approximately 20% real Regulatory Capital Value (RCV) growth during the upcoming AMP8 regulatory period, marking a significant turnaround from the negative real growth experienced in AMP7.
The firm noted that although the UK water regulator, Ofwat, did not grant United Utilities 'outstanding' status, other indicators such as Outcome Delivery Incentives (ODIs) and a 4-star rating from the Environment Agency suggest that the company is performing at a top-tier operational level. This performance is seen as an indicator of the company's ability to create value.
The analysis by BofA Securities also suggests that even with a likely increase in Total Expenditure (TOTEX) allowance at the Final Determination (FD), United Utilities' gearing levels are expected to stay below the thresholds that would affect the sustainability of the Consumer Price Index (CPI)-linked dividend in the AMP8 period.
Additionally, the firm anticipates that United Utilities will not be under immediate pressure to make decisions regarding the funding of sustained capital expenditures expected in the next decade during AMP9.
As a result of a comprehensive revision of estimates, including those for the Net Present Value (NPV) of value creation, the price objective for United Utilities has been raised to 1,245 pence, indicating an 18% upside potential.
The firm highlighted that United Utilities is currently trading at a 10% FY'25 RCV premium compared to the long-term average of 19.6%. It was also pointed out that the short interest in the stock is the lightest of the three utilities at just 3%.
In other recent news, United Utilities Group has been a subject of interest for financial analysts. UBS analyst Mark Freshney upgraded the company's stock from Neutral to Buy, setting a slightly reduced price target of GBP11.50.
Despite lowering the earnings per share (EPS) estimates for the fiscal years 2026 to 2028, Freshney believes the company's dividend payouts would be sustainable. The EPS revision stems from a reduction in the regulatory capital value (RCV) run-off rate, a £76 million penalty from an OFWAT investigation, and a decrease of 10 basis points in the allowed returns.
Contrarily, Barclays downgraded United Utilities from 'Equalweight' to 'Underweight', adjusting the price target from GBP13.15 to GBP9.75. This decision was influenced by recent regulatory decisions and market conditions, including Ofwat's decision not to categorize United Utilities' business plan as outstanding. The company's growth potential has been impacted due to lower allowed returns and stringent Outcome Delivery Incentives (ODI) targets set by Ofwat.
Ofwat's adjustments to United Utilities' 2030 Regulatory Asset Base (RAB) have notably reduced the company's valuation by £3.6 billion, a decrease of 18.5%. Additionally, Ofwat expanded its ongoing Combined Sewer Overflow (CSO) investigation to include all wastewater companies, marking the start of enforcement actions against United Utilities. These developments are among the recent events affecting the company.
InvestingPro Insights
InvestingPro data indicates that United Utilities Group PLC (OTC: UUGRY) is currently commanding a Market Cap of approximately $9.52 billion, reflecting the scale of the company within the utilities sector. The company's P/E Ratio stands at a substantial 57.02, suggesting that investors may be expecting higher future earnings or viewing the company as having a stable earnings outlook. Notably, United Utilities has demonstrated a robust Gross Profit Margin over the last twelve months as of Q4 2024, at an impressive 88.73%, which aligns with the high operational performance noted by BofA Securities.
Among the InvestingPro Tips, it's worth highlighting that United Utilities has raised its dividend for 12 consecutive years and has maintained dividend payments for 33 consecutive years, which may be particularly appealing to income-focused investors. Moreover, the company's net income is expected to grow this year, providing a positive outlook for potential investors. For those interested in a deeper analysis, InvestingPro offers additional tips on United Utilities, which can be found at: https://www.investing.com/pro/UUGRY.
The company's commitment to consistent dividend payments, coupled with the expectation of income growth, reinforces BofA Securities' optimistic stance on United Utilities. With a dividend yield of 5.63% as of the last dividend date in 2024, the company presents an attractive proposition for shareholders seeking steady returns. The InvestingPro Fair Value estimate of $21.37 also provides a reference point for investors considering the stock's valuation.
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