Utilities shares fall on back of downgrades

Utility companies have taken a hit on the back of downgrades from a number of investment banks.

Societe Generale cut its rating for United Utilities from 'buy' to 'hold' despite an expectation of reassuring first half results due out on 25 November.

It said the recent strong share price performance (+14% relative to FTSE 100 since August) had driven the share price marginally above its 940p fair value and "the strong share price performance has been at odds with the recent rise in real bond yields (given 0.6x historical beta to gilt yield movements)".

However the investment bank noted that United Utilities remained its preferred UK water holding and that it still prefers UK water over UK energy in the utilities market.

Exane remined neutral on the stock, but updated the price target to 900p from 870p.

Centrica was also downgraded to 'hold' by HSBC from 'buy', and also had its target price lowered to 250p from 300p.

It said that the recent stock underperformance reflects a news vacuum for the company and a slide in commodities.

“We think Centrica offers, at best given current commodity conditions, modest growth in earnings for 2016e, so the market will expect a higher yield.”

Water company Severn Trent was also hit as Exane lowered its price target from 2240p to 1900p and downgrading it from 'neutral' to 'underperform'.

“We recognise that renewed M&A is the main upside risk to our valuations. Nevertheless we now think Severn Trent is the most expensive of the UK water companies.”

Severn Trent had taken the biggest hit on the market, down 54p (2.47%) to 2,131p at 1040 GMT.

United Utilities shares dropped 20.5p (2.14%) to 937p by the same time, while Centrica shares had dropped 4.93p (2.20%) to 219.77p