Jefferies Analysts Downgrade UK Utility Stocks

Jefferies analysts have downgraded two major UK utility stocks: United Utilities (OTC:UUGRY) and Severn Trent (LON:SVT) from "buy" to "hold."

Context

This change comes in anticipation of a significant regulatory update for the water sector expected later this month. While exhibiting cautious optimism about Ofwat's final determinations on December 19, the analysts highlighted a more balanced risk-reward outlook for these stocks given current valuations and ongoing regulatory uncertainties.

United Utilities

• Jefferies reduced United Utilities’ price target by 3% to 1,190p, indicating a moderated outlook on equity returns and regulatory challenges.
• Currently, United Utilities is trading at a 10% premium to its regulatory capital value, slightly less than its five-year average of 13%.
• Analysts anticipate that Ofwat's determinations will clarify the company's capacity to achieve the targeted 6.2% real equity returns (including 5.2% base returns and 100 basis points of outperformance).
• There are concerns regarding the company's balance sheet, with Moody’s placing United Utilities on a negative outlook, suggesting the possibility of an equity raise or future dividend adjustments. The limited upside at current valuations leads analysts to consider the stock fairly priced.

Severn Trent

• Likewise, Jefferies reduced Severn Trent’s price target by 1% to 2,830p. The stock currently trades at a 20% premium to its regulatory capital value (RCV), supported by a strong history of surpassing output delivery incentives.
• However, analysts foresee a stricter regulatory environment that might restrict the company's ability to maintain past outperformance.
• Severn Trent’s proactive £1 billion equity raise from last year has bolstered its balance sheet, but analysts believe its valuation has already incorporated these benefits, leaving little room for additional gains.

As of 9:12 ET (14:12 GMT), shares of both United Utilities and Severn Trent have seen a decline of over 1% each.