Investing.com -- Jefferies analysts have upgraded Engie (EPA: ENGIE ) to a "buy" rating, revising their previous downgrade from January.

This decision is driven by Engie’s strong FY24 update, which has presented a more compelling equity story, according to Jefferies.

The analysts at Jefferies now foresee a clearer path for Engie to achieve normal utility growth from 2026 onwards.

They believe that Engie’s 2027 guidance is achievable, supported by visible earnings and a credible earnings strategy.

This outlook is further strengthened by what Jefferies describes as best-in-class management, which has consistently delivered on a turnaround.

Jefferies estimates that Engie will be able to return to normal utility growth from 2026, projecting an EPS/DPS CAGR of 4-5% across 2026-30.

This growth is expected to be supported by increasing exposure to renewables and electricity grids, which Jefferies believes will help Engie close its historical discount to peers and achieve a valuation more in line with a typical utility.

Jefferies also points to helpful company details that provide confidence in Engie’s earnings for 2024-27.

Their assessment of Engie’s 2024-27 EBIT bridge indicates a reasonable earnings profile with manageable downside risk.

Engie is focusing on increasing the proportion of contracted/regulated earnings, targeting 63% of 2027 contracted/regulated EBIT, up from 42% in 2024.

The company has a strong track record in this area, demonstrated by its leadership in signing green PPAs, with 4.3GW of PPAs signed in 2024, compared to 2.7GW in 2023, and a total portfolio of 14GW.

Jefferies also notes that visible below-the-line upgrades, such as tax and lower net interest, along with prudent normalization assumptions on power prices and volatility, contribute to their confidence in Engie’s earnings delivery.

In regards to overhangs, Jefferies analysts consider those highlighted in their January downgrade note to be broadly manageable.

They state that the risk from French politics is less pronounced in the near term due to the passing of the 2025 budget, and they view the risk of further taxation in the coming years as manageable.

Additionally, they believe that weakness in Engie Brasil is already factored into the stock price, with limited scope for further deterioration.

Jefferies has also raised its price target to €20 from €16.60, representing a 20% increase.

This target implies a total shareholder return of approximately 20% and a 10x FY27 P/E, which is about a 20% discount to Endesa/Iberdrola.

Jefferies views Engie as a compelling defensive play with an attractive dividend profile, supported by visible earnings.

The brokerage believes that delivering typical utility growth will aid in the stock’s re-rating and help it achieve a valuation closer to long-term sector averages.

The stock is currently trading at 9x 1-year forward P/E and an 8% dividend yield, which is a 25% discount to the peer average and a +100bps spread on dividend yield.

However, Jefferies also identifies key risks to their “buy” thesis, including French politics, weak hydro volumes, US supply chain risk from tariffs, and lower-than-expected contracting of group earnings.