By Michele Maatouk
Date: Tuesday 06 Dec 2022
LONDON (ShareCast) - (Sharecast News) - JPMorgan Cazenove downgraded United Utilities on Tuesday as it took a look at the UK water sector.
The bank noted that it turned more cautious on the sector in June and said it remains cautious today, due to regulatory and macroeconomic headwinds.
JPM pointed out that next week, water regulator Ofwat will publish the final methodology for the next price control, PR24, which starts in April 2025.
"We believe that the regulator's initial view of returns will surprise the market to the downside - we place United Utilities, Severn Trent, and Pennon on negative catalyst watch into the event," it said.
"Over the coming months, we expect earnings downgrades to continue, as companies will not be fully passing through inflation to customers next year."
The bank downgraded United Utilities to 'neutral' from 'overweight' on valuation grounds, as the best-performing UK water company year to date.
It remained 'neutral' on Pennon as while it sees the most downside to earnings, a 5% FY25 dividend yield should support the shares.
JPM kept its 'underweight' rating on Severn Trent as the most expensive stock on a dividend yield basis, and where it sees the lowest upside.
The bank's top picks remain stocks with UK Power Generation exposure (SSE, Centrica, Drax) and UK electricity networks (SSE, National Grid).