HSBC upgrades United Utilities to 'buy'

29th Jun 2015 09:29

HSBC upgraded United Utilities to 'buy' from 'hold' and bumped up its price target to 1,050p from 1,000p.HSBC said it continues to value the company using three methodologies: discounted cash flow, dividend yield and sum of the parts.It assigns 50% weight to dividend yield and 25% each to DCF and SOTP to arrive at its fair value price target, which implies an upside of around 10%.HSBC said it now assumes a slightly lower level of net debt in 2016 than previously, while the dividend yield assumption is unchanged at 3.5%.The bank pointed out that United Utilities has outperformed its cost of debt, creating over £300m of value in the last regulatory period."We believe there are further opportunities for this to occur again. The company's average rate of index-linked debt is 1.6%; therefore United Utilities should theoretically be able continue to beat Ofwat's assumptions of 2.59% real cost of debt," it said.At 09:43, shares wereup 0.1% at 940p, outperforming a sharply lower London market.