On Friday, Morgan Stanley (NYSE:MS) issued a downgrade for Redeia Corp SA (RED:SM), moving its stock rating from Equalweight to Underweight and adjusting the price target to €16.00 from the previous €17.00. The firm pointed out that despite a limited absolute downside, Redeia is anticipated to underperform compared to its peers in the regulated utilities sector, which offer better risk-reward profiles and growth valuations.
The downgrade comes as a response to the company's recent performance and future prospects. Morgan Stanley acknowledges that Redeia has seen significant improvement over the last 18 months, transitioning from minimal Regulatory Asset Base (RAB) growth and declining earnings to a more favorable outlook.
The analyst notes that the company's RAB Compound Annual Growth Rate (CAGR) is expected to be around 5% from 2024 to 2030, which is a marked improvement from a -1% CAGR observed from 2018 to 2024.
Additionally, Redeia's capital expenditure in Spanish electricity transmission is set to accelerate, which is predicted to lead to an inflection point in earnings. Morgan Stanley estimates a 7% earnings per share (EPS) CAGR for Redeia over the period from 2024 to 2030. These projections reflect a positive shift in the company's trajectory, offering a more optimistic view of its financial health in the coming years.
Furthermore, there are expectations of an improving regulatory framework that could benefit Redeia. The analyst anticipates an increase of 100 basis points on the allowed return for the new regulatory cycle. This potential regulatory enhancement could provide a more supportive environment for the company's growth and profitability.
Despite these improvements, Morgan Stanley's assessment suggests that other stocks in the regulated utilities sector may present more attractive opportunities for investors, hence the downgrade to Underweight. The firm's analysis indicates that while Redeia has made strides, the stock may not perform as well as others in its category, leading to the revised price target of €16.00.
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