Water suppliers share prices rally as investors welcome turnaround plans
Some of the UK’s largest waters companies have seen a bounce in their share price, with investor sentiment warming towards the troubled industry.
Three of the country’s publicly listed suppliers enjoyed a robust trading session yesterday, with Pennon (3.18 per cent), Severn Trent (2.82 per cent) and United Utilities (1.92 per cent), all rising on the London Stock Exchange.
Severn Trent is now priced at 2,516p per share on the FTSE 100 ahead of markets opening today, with United Utilities priced at 1,019p per share on the same index, and Pennon trading at 682p per share on the FTSE 250.
This comes as investment analyst Jefferies upgrades its stance for the water sector to ‘Buy’ – praising the business plans of the three companies, which collectively represent nearly 15m customers.
These are the strategies the companies have to submit to regulator Ofwat to outline its spending over the next five years, and how it hopes to raise revenues to meet turnaround plans to fix leaking pipelines, creaking infrastructure and boost customer.
Jefferies argues that the plans present an “unprecedented opportunity for multi-year growth” in a note presented ahead of trading this morning.
“This, alongside a potential for reasonable investment returns, outweighs our previous concerns about political and regulatory risk. In addition, the substantial step-up in investment is likely to improve sector performance on environmental issues, all the while bills appear to be manageable,” Jefferies said.
It has set fresh target prices for each of the companies, with buy stances for Severn Trent (2,950p per share target price), United Utilities (1,200p per share target price), and Pennon (850p per share target price).
It argues that Severn Trent’s recent £1bn equity raise has “bolstered their balance sheet” significantly, raising expectations it will deliver its business plans for the upcoming pricing window.
The group’s confidence in United Utilities and Pennon is so robust Jefferies does not see a need for either company to raise more equity.
The bullish investor forecast is a rare good news story for the beleaguered industry, with Big Nine suppliers creaking under a £54bn debt mountain – with Thames Water top of the pile holding fully £14bn in debts.
Suppliers are pushing for an up to 40 per cent hike in household bills for the next pricing window – as first reported by The Times – to fund vital upgrades to the network and ensure the sustained flows of water customers rely on from their taps, faucets and showerheads every day.
Meanwhile, Water UK has confirmed that consumers will be asked to pay as much as £130 per year extra by the end of the decade to fund a collective £96bn upgrade plan across the industry.
Jefferies estimates a rise of at least £30 per year for households, and accepts risks remain to its thesis – with plans still requiring approval from regulators and Labour holding a bullish stance against the industry ahead of next year’s likely election.
They said: “We reiterate that regulatory risks still remain, including the looming UK elections where poll-leading Labour has been vocal in its criticism of the water sector. The business plans also still have to undergo Ofwat’s regulatory and won’t be finalised until December 2024.”