On Tuesday, BofA Securities revised its stance on Unite Group (LON:UTG:LN), downgrading the stock from Buy to Neutral and adjusting the price target to GBP9.50 from the previous GBP10.60. The downgrade reflects a moderated outlook for the company's growth potential, with analysts noting a decrease in the anticipated upside of the stock's value.
According to BofA Securities, the new price target of 950p, which represents a 10% decrease from the former target, leaves a 24% potential upside relative to Unite Group's current share price. This is less than the average 33% upside potential seen across the firm's coverage. The analysts have cited that the current valuation multiples, with an implied capitalization rate of approximately 6% and a 27% discount to Net Disposal Value (NDV), adequately represent the company's expected normalization and deceleration of growth.
BofA Securities acknowledges that Unite Group is projected to experience an average annual EPS growth of 6% over the next five years, which is above the sector average. However, they anticipate a slowdown in rent growth from over 7% in 2023-24 to 5% in 2025, and even lower to below 4% by 2027. This outlook is more cautious than the consensus, with BofA Securities' EPS estimates being 3% below the average for the years 2024-26.
The firm also anticipates potential further earnings downgrades for Unite Group in the future. This assessment is based on the slowing growth of rental income, which is a significant factor for the company's earnings. BofA Securities' analysis suggests that while Unite Group is still expected to grow, the pace of this growth may not be as robust as previously estimated.
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