Jefferies Upgrades E.ON on German Grid Outlook, Downgrades Severn Trent

Analysts at Jefferies upgraded German utility E.ON SE to “buy” from “hold”, arguing the market is underestimating the potential for a significant increase in grid investment in Germany. In a separate move, the investment bank downgraded UK water utility Severn Trent to “hold” from “buy” following a period of stock outperformance.

E.ON Upgraded on Investment Potential

Jefferies raised its price target for E.ON by 30% to €22.70 from €17.40, implying a potential 21% upside from current levels. The bank's analysts believe E.ON is poised to accelerate its capital spending on energy networks ahead of two key regulatory milestones in Germany: the 2026 network development plan (NAP’26) and a draft decision on the weighted average cost of capital (WACC).

According to the research note, this accelerated spending could transform E.ON's earnings profile. The firm's analysis suggests the utility could shift from its current earnings per share (EPS) compound annual growth rate (CAGR) of roughly 5% to a double-digit growth rate, a transition not yet reflected in the company's valuation.

Jefferies outlined several scenarios for E.ON's German network capex through 2030:

• Base Case: €31 billion, which is 20% above E.ON's guidance and could add 5% to 2030 consensus EPS.
• High Case: €34 billion, or 30% above guidance, potentially adding 15% to 2030 consensus EPS.

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Severn Trent Downgraded Amid UK Risks

For Severn Trent, Jefferies lowered its rating to “hold” while keeping its price target largely unchanged at 3,220 pence. The downgrade follows the stock’s approximately 10% outperformance since January.

The analysts cited political and affordability risks as significant overhangs for the UK water sector. They also pointed to a lack of clarity on the scope, economics, and funding for potential future investments for Severn Trent and its peers.

Reflecting a higher UK risk-free rate, Jefferies increased its assumed cost of equity for the company to 8.5% from 8.2%. This led the bank to lower its assumed premium on the company's regulated asset base (RAB).