UBS Upgrades E.ON to 'Buy' on Overlooked Power Grid Potential

UBS upgraded German utility E.ON SE to "Buy" from "Neutral" on Monday, asserting that investors are overly focused on regulatory headwinds for gas while missing the core growth story in electricity infrastructure. The bank raised its 12-month price target on the stock to €20.00 from a previous €19.50, citing the company's recent share price underperformance as an attractive entry point.

Market Mispricing Core Assets

According to the UBS Global Research report, financial markets have fixated on draft proposals for the Weighted Average Cost of Capital (WACC) for German gas networks. However, analysts at the bank argue that E.ON's power distribution networks are the company's primary value driver, set to comprise around 93% of its German regulated asset base (RAB) by 2030.

UBS projects the allowed pre-tax return for these electricity networks will be 115 to 160 basis points higher than the proposed return for gas. "In our view, Germany needs to strike a balance of affordable allowed WACC with the investment incentives required to deliver its grid expansion," the analysts noted, highlighting E.ON's strong record of outperforming regulatory baselines through efficiency.

Investment and Earnings Upside

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The bank forecasts that E.ON will deliver approximately 7% in compound annual growth for both adjusted EBITDA and earnings per share (EPS) over the 2025–2030 period. This growth is expected to be fueled by significant capital deployment into its power grid.

E.ON has identified between €5 billion and €10 billion in financial headroom for further investment. UBS estimates this could drive the company's annual capital expenditure in its German networks to €7.3 billion by 2029, a figure that significantly exceeds the roughly €6 billion implied by E.ON's current plans.

Regulatory Timeline

Investors are watching for several key regulatory milestones ahead. The final determination on the WACC for gas networks is expected by the end of 2026, while the draft proposal for power distribution returns is anticipated in the third quarter of 2027. In its sector-wide view, UBS also holds "Buy" ratings on Elia Group and Italgas, while maintaining a "Sell" rating on National Grid PLC due to execution risks.