UBS Upgrades Snam to 'Buy,' Citing Unjustified Valuation Discount to Peers

UBS has upgraded Italian gas utility Snam (SRG.MI) to “Buy” from “Neutral,” citing a recent share price decline that the bank believes has created an unjustified valuation discount compared to its European peers.

Valuation Gap Creates Opportunity

In a note to clients, UBS argued that Snam's 10% stock drop over the past three months has erased earlier gains and caused it to underperform the sector. The bank attributed the decline to rising bond yields and regulatory uncertainty, which it believes the market has overreacted to.

This underperformance has left the stock trading at a roughly 15% discount to its peers on a price-to-earnings basis. UBS called this discount unjustified, pointing to the company's solid growth prospects:

• A projected 5.6% compound annual growth rate (CAGR) for its asset base from 2025 to 2030.
• A 4.1% normalized earnings-per-share (EPS) CAGR over the same period.
• A dividend yield of 5.6% in 2026, expected to rise to 6.5% by 2030.

UBS set a new 12-month price target of €6.60 for the stock, a slight 1% decrease from its previous target of €6.70.

Regulatory Outlook and Catalysts

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While acknowledging market concerns over upcoming regulatory reviews, UBS stated that Italy's regulator has historically favored stability. The bank suggested investors are overlooking recent positive developments, including earnings beats in the first and second quarters.

Several key regulatory developments are expected in the coming months, including a November decision on the 2027 weighted average cost of capital (WACC) and further consultations on the post-2028 regulatory framework. UBS also noted potential upside from a planned €3 billion asset-rotation program and the mandated sale of its biomethane business, which the bank values at approximately €455 million.

Forecasts and Risks

Reflecting a more conservative view on future operating expenditures and higher debt costs, UBS trimmed its adjusted net income forecasts for Snam for 2026-2030 by 1%. However, the bank's projections remain broadly in line with company guidance and market consensus.

The primary risks to the outlook are regulatory. UBS calculated that a harsher-than-expected regulatory outcome could potentially reduce its EPS forecasts by 3% to 4% compared to its base-case scenario.