United Utilities (LON: UU.) shares rose more than 1% on Wednesday after RBC Capital upgraded the company’s rating to Outperform from Sector Perform.
The investment bank also raised its price target for the stock to 1,150p, up from 1,050p per share.
RBC Capital’s analysts believe that United Utilities is well-positioned to benefit from a “capex super cycle” in the UK water sector.
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“The UK water sector is entering a capex super cycle with multiple periods of strong RCV growth,” writes RBC. “As such, we would expect that the equity debate will not go away as companies invest for value accretive growth; however, UU appears to be well-placed.”
They anticipate that the company will see strong revenue growth in the coming years, driven by increased investment in infrastructure and a higher allowed return on capital.
The firm’s positive outlook is based on several factors, including:
- Favourable regulatory environment: RBC Capital expects that the UK’s water regulator, Ofwat, will approve a higher level of investment for the sector in the upcoming AMP8 period.
- Strong balance sheet: The bank says United Utilities has a solid financial position, which will enable it to fund significant capital expenditure without compromising its credit rating.
- Growth potential: The company’s investments in infrastructure will drive long-term growth and create value for shareholders, according to RBC.
The upgrade from RBC Capital provides a short boost to United Utilities shares, although the stock still remains somewhat rangebound, as it has done since around 2021.
So far this year, it is down around 3%, although it has gained over 8% in the last 12 months.
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