Investing.com -- UBS has downgraded E.ON SE (ETR: EONGn ) to a “neutral” rating from its previous “buy” recommendation, citing that the stock’s recent performance and valuation fully reflect its growth outlook, in a note dated Tuesday.
The decision comes after the utility’s share price surged 34% year-to-date, substantially outpacing the broader sector.
UBS also trimmed its 12-month price target to €15.50 from €16, suggesting limited upside from the April 25 closing price of €15.03.
The analysts pointed to E.ON’s above-average growth profile, with underlying EBITDA and earnings per share projected to grow 7% and 9% annually between 2024 and 2026, respectively.
However, UBS emphasized that these projections are now priced into the stock, with its own estimates largely aligned with consensus expectations and no material earnings upgrades anticipated.
The brokerage expressed caution amid broader macroeconomic uncertainty, noting that other regulated network operators may offer more defensive investment profiles.
Valuation was a core factor in the downgrade. While E.ON continues to demonstrate strong performance in regulated network operations, which contribute roughly 75% of its EBITDA, UBS revised its valuation of the company’s Customer Solutions division downward, cutting the applied EV/EBITDA multiple by 0.5x.
This reflects a more conservative stance due to external economic risks affecting the retail energy market.
UBS also acknowledged Germany’s evolving energy policy landscape as a critical factor influencing E.ON’s outlook.
In January, the Bundesnetzagentur, the country’s energy regulator, released early proposals for the next regulatory period governing gas and electricity distribution.
Though the financial implications remain uncertain, E.ON could ramp up capital expenditures by €5 billion to €10 billion if returns prove attractive.
A decision on the framework is expected by the end of 2025, with E.ON likely to revise its capex strategy in early 2026.
While the company’s transition to reporting underlying earnings metrics aims to provide a clearer picture of its financial trajectory, adjusting for one-off items and regulatory timing effects, UBS noted the discrepancy between underlying and adjusted growth metrics.
For 2024–2026, adjusted EBITDA and EPS are expected to post compound annual growth rates of just 2% and –3%, respectively.
The report argues that underlying performance offers a more accurate view, but reiterates that the market has already internalized these figures.
Additionally, UBS viewed the potential benefit from Germany’s newly announced €500 billion infrastructure fund as limited.
Spread over 12 years and encompassing a wide range of projects, from roads to public buildings, the fund allocates only a portion to electricity distribution, diluting its impact on E.ON’s earnings potential.
Priority appears to be skewed toward transmission infrastructure rather than distribution grids, further capping benefits for the company.
Despite the downgrade, UBS acknowledged E.ON’s strengths, including its leading position in electricity distribution across Germany, Sweden, and the Czech Republic, as well as a robust, fully funded capex program.
However, with the company trading at 13.3 times estimated 2025 earnings and offering a dividend yield below peers at 4.1%, UBS sees limited near-term catalysts to justify a continued overweight position.