Jefferies ups Centrica to 'buy', downgrades United Utilities and Severn Trent
Jefferies upped its stance on Centrica shares on Thursday as it highlighted an attractive risk/reward in a broader note on utilities, in which it referred to the stock as a "value wildcard".
Centrica was boosted to 'buy' from 'hold' as Jefferies said the company's new strategy was likely to deliver stable earnings and a more resilient dividend and balance sheet.
"Clearly, there are execution risks relating to cost-cutting measures and disposals, but with the stock trading at a 50% discount to the utility sector (at historical lows of 8x forward price-to-earnings) and offering 6.7% cash yield, we see the risk-reward as attractive," it said. It has a 90p price target on Centrica.
Jefferies downgraded its rating on shares of United Utilities to 'underperform' from 'hold' and slashed the price target to 660p from 870p.
The bank initiated coverage of the stock with a supportive stance on the UK water sector in June. However, it said that its mark-to-market assessment of regulation suggests that baseline returns are likely to see a further reduction in December.
"With this, we see amplified risks around the sustainability of UU's current dividend policy, and see material downside to consensus forecasts," it said. "On our forecasts, the stock currently offers a sector low FY20-22 dividend yield, circa 25% valuation premium to the peer group."
Jefferies cut its recommendation on Severn Trent to 'hold' from 'buy' and lowered the price target to 1,920p from 2,340p as it pointed to more risk to dividend per share growth.
At 1330 BST, Centrica shares were up 2.1% at 74.28p, UU shares were down 1.1% at 794.80p and SVT shares were 1% lower at 2,081p.