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Investing.com -- RBC Capital Markets has downgraded United Utilities Group Plc (LON:UU) to “sector perform” from “outperform,” citing reduced upside potential at current valuation levels, in a note dated Friday.
The brokerage maintained its price target of 1,175p per share, compared with a closing price of 1,143.50p, implying just 2.8% upside.
The brokerage said United Utilities’ recent performance and updated guidance no longer support an “outperform” rating.
While the company presented a robust operational outlook during its recent Capital Markets Day, highlighting a £9 billion capex plan and a £2.4 billion investment program targeting a reduction in sewage overflow spills to 17.8 by 2030, RBC sees limited near-term catalysts.
United Utilities (OTC:UUGRY) continues to guide for at least 100bps of return on regulated equity (RoRE) outperformance during AMP8.
However, RBC noted the absence of a detailed breakdown of this outperformance and flagged concerns over expected outcome delivery incentive (ODI) penalties in FY26.
The company had earned £128 million in ODI rewards during AMP7, below initial guidance of £200 million, and no forward ODI guidance was issued for AMP8.
RBC forecast FY26 adjusted EPS at 100.7p, above consensus estimates of around 93p, supported by expected year-over-year reductions in operating costs.
Despite the near-term earnings boost, the analysts lowered assumptions on ODI contributions for AMP8, which offset the valuation benefits from stronger bottom-line performance.
On financial strength, United Utilities is expected to maintain gearing at about 64% by the end of AMP8, below Moody’s 68% threshold.
Unlike listed peers Severn Trent (LON:SVT) and Pennon (LON:PNN), the company did not raise equity ahead of the regulatory period, preserving its balance sheet position.
United Utilities also projects a nominal regulatory capital value growth of around 7% through AMP8, placing it between Severn Trent and Pennon. Dividend yield is forecast at 4.7% for FY26, in line with the sector average.
In valuation terms, RBC applies a segmented sum-of-the-parts model, using a ~12x EV/EBITDA multiple for the regulated water business and 8x for non-RAB segments. The bank continues to use the carrying value of debt, with no fair value adjustments.