United Utilities stock downgraded to Hold by Jefferies, sees risk-reward balance

On Friday, United Utilities Group PLC (UU:LN) (OTC: OTC:UUGRY), a UK-based water company trading near its 52-week high with a current price of $28.68, had its stock rating downgraded by Jefferies from "Buy" to "Hold." Accompanying this change, the firm also set a price target for the company's shares at GBP1.19. The company maintains impressive gross profit margins of nearly 90%.

The decision to downgrade the stock rating was based on the current trading premium of the company's shares. United Utilities (LON:UU) is trading at approximately a 10% FY25/26 Regulatory Capital Value (RCV) premium compared to its five-year average of 13%. Jefferies believes that upcoming Final Determinations (FDs) from Ofwat, the water services regulation authority in England and Wales, will provide clarity on the company's potential to achieve a 6.2% real equity return.

This figure includes a 5.2% base equity allowance plus a 100 basis points outperformance, along with a 5.5% RCV growth. According to InvestingPro analysis, the stock is currently trading above its Fair Value, with a high P/E ratio of 67.4.

However, concerns were raised about the company's financial leverage. Jefferies pointed out that the balance sheet of United Utilities appears tight, suggesting that while an equity raise is not expected in their base case scenario, there are financial situations where the company might need to raise equity by 10% with a 10% scrip dividend.

The analysis by Jefferies concluded that the risk-reward profile for United Utilities is now balanced, leading to the downgrade in the stock's rating to "Hold." The firm's assessment reflects a cautious stance on the company's financial structure and the potential outcomes of regulatory decisions.

In other recent news, United Utilities Group PLC has received several updates from financial analysts. The company's stock was upgraded from Neutral to Buy by a Citi analyst, who also raised the price target to GBP11.37. Citi's positive outlook is based on United Utilities' strong balance sheet and potential within the water sector, particularly in the lead-up to the regulatory review.

Similarly, RBC Capital upgraded United Utilities' stock from Sector Perform to Outperform, raising the price target to GBP 11.50. The firm anticipates United Utilities will benefit from the upcoming final determination, expecting the company to benefit from higher allowed total expenditure. United Utilities' strong balance sheet is highlighted as a key factor that will provide the flexibility needed to finance substantial investment throughout Asset Management Plan 8 (AMP8).

BofA Securities also issued an upgrade for United Utilities Group PLC stock, shifting the rating from Neutral to Buy and increasing the price target to £12.45. The firm anticipates about 20% real Regulatory Capital Value (RCV) growth during the upcoming AMP8 regulatory period.

Contrarily, Barclays (LON:BARC) 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.

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