UBS Upgrades Snam to Buy, Citing Unjustified Valuation Discount

UBS has upgraded Italian gas utility Snam to 'buy' from 'neutral.' The bank cites a valuation discount relative to peers that it views as disconnected from the company’s growth trajectory. The upgrade follows a period where the stock faced downward pressure from macroeconomic headwinds and shifting regulatory expectations.

Snam shares have declined 10% over the past three months. UBS analysts suggest this trend has created an approximate 15% price-to-earnings discount compared to the company's European utility peers. Despite this market pullback, UBS maintains a positive outlook on the firm's infrastructure expansion.

Growth Projections and Asset Base

UBS projects that Snam’s regulated asset base will expand at a 5.6% compound annual growth rate (CAGR) between 2025 and 2030. During this period, the bank forecasts a 4.1% normalized earnings-per-share CAGR, driven by the company's investments in gas infrastructure.

UBS adjusted its 12-month price target for Snam to €6.60, a decrease from its previous target of €6.70. This adjustment reflects a recalibration of market conditions instead of a change in the company's fundamental business health.

Regulatory Catalysts and Market Sentiment

Investor sentiment toward Snam has been tempered by uncertainty regarding the Italian regulatory environment. Two events are influencing the market’s perspective on the utility:

• WACC Determination: The upcoming November decision regarding the 2027 weighted average cost of capital (WACC).
• ROSS Framework: Ongoing consultations concerning the 'Regulation by Objectives of Service' (ROSS) framework, which will govern operations post-2028.

These regulatory milestones are important for utilities like Snam, as they determine the allowed return on capital for infrastructure investments. The uncertainty surrounding these decisions, combined with rising bond yields, has contributed to recent volatility in the stock price.

What Is at Stake for Investors

The gap between Snam’s current valuation and its projected asset growth highlights the market's risk-averse stance toward utilities with high regulatory exposure. By upgrading the stock, UBS is signaling that the current market price does not account for the company's growth plan. The firm is focusing on the upcoming November regulatory updates as a factor for the stock's valuation.