Failure of an unlisted water company could be good for listed rivals Pennon Group PLC (LSE:PNN, OTC:PEGRY), Severn Trent PLC (LSE:SVT) and United Utilities Group PLC (LSE:UU.), according to Citigroup.
Noting the recent news coverage of potential default and nationalisation of privately owned Thames Water have "shaken investor confidence" in the FTSE 100-listed trio, the US investment bank also said nationalisations "of financially healthy water utilities under a Labour Government remain a low probability", ahead of the expected general election next year.
In the medium term, the failure of an unlisted water utility "could actually be a positive for the sector with fair returns to ensure this does not become an endemic issue," the analysts added.
They predicted water utility shares will trade "close to their forward RABs", referring to the value of their regulatory asset base, or the water networks, reservoirs and treatment works they own.
This would put them "close to their historic lows in absolute and relative to other regulated utilities", which would make their valuations "attractive".
However, Citi sees current valuations remaining "trapped for the months come" until there is further clarity around the pending Ofwat and Environment Agency investigation of sewerage discharge, the completed regulatory review and UK General Election.