Analysts at Credit Suisse have cut their target price for United Utilities Group PLC (LSE:UU.) (UU) to 980p from 1,170p after reducing estimates for the multi-utility but have maintained a 'neutral' rating on the stock.
The Swiss bank's analysts said they have reduced their 2023 EPS estimates for UU from +8.2p to -3.0p, mainly reflecting a -1% year-on-year drop in revenues (previously +1%) and around £30m higher operational costs.
They noted that their target price falls as they assume a higher cost of capital - including around a 7.7% nominal cost of equity, from 6.7% previously - and halve their totex (Capital Expenditure + Operational Expenditure) outperformance.
The analysts noted that UU is spending an additional around £765mln on totex of which about £500mln is investment not approved by regulator OFWAT. Taking into account 50:50 sharing, outperformance, super deductions, and around a 10% RAB premium, the capex is value-neutral.
They said: "We see nominal regulated returns on equity reaching c20% in the current financial year, even with the cost of the higher index-linked debt (in the EPS). This will take the average nominal return for the review to c10-11%. The benefit is mostly retained to help fund extra capex. We assume normalized CPIH and RPI from year-end."
UU shares were trading at 897.20p late Monday afternoon, up 5% on the previous close. The stock has fallen 18% in the past three months due to rate rises.
The Credit Suisse analysts noted that UU is the cheapest UK-regulated utility, with its stock trading at around a 1% discount to March 2024 RAB, whereas Pennon PLC is at circa 5% and Severn Trent PLC circa 2%, while UU's full-year March 2023 dividend yield of around 5.8% is close to the UK utility sector average of circa 5.6%.
In the UK utilities space, the analysts said their top pick is National Grid PLC, given more asset base growth potential.