Barclays flags regulatory hurdles and downgrades United Utilities stock

On Monday, Barclays issued a downgrade for United Utilities (OTC:) Group PLC (UU:LN) (OTC: UUGRY) stock, moving its rating from ‘Equalweight’ to ‘Underweight’. The firm also adjusted the price target for the company’s shares from GBP13.15 to GBP9.75. The adjustment follows a reassessment of the company’s prospects in light of recent regulatory decisions and market conditions.

The downgrade was prompted by the regulatory body Ofwat’s decision not to categorize United Utilities’ business plan as outstanding, which was contrary to Barclays’ expectations.

This has presented a challenging environment for the water sector, particularly for United Utilities. The company has faced a significant decrease in growth potential due to lower allowed returns and stringent Outcome Delivery Incentives (ODI) targets set by Ofwat.

Ofwat’s recent adjustments to United Utilities’ 2030 Regulatory Asset Base (RAB) have notably impacted the company’s valuation. The regulator’s reduction of the RAB by £3.6 billion, a decrease of 18.5%, is significant and has influenced Barclays’ analysis of the company’s stock value.

Despite United Utilities trading at a 10% premium to its Regulated Capital Value (RCV), Barclays’ valuation stands at a 7.5% premium, indicating a disparity between the market price and the firm’s valuation.

Furthermore, Ofwat has expanded its ongoing Combined Sewer Overflow (CSO) investigation to include all wastewater companies, signaling the commencement of enforcement actions against United Utilities and Severn Trent (LON:), despite both companies achieving high scores in their Environmental Assessment Performance ratings.

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