Severn Trent PLC (LSE:SVT) has been boosted by an upgrade by Barclays in a sector review in which the bank highlights its favoured water play as Pennon.
The broker moved the stock to 'overweight' from 'equal weight' but nudged its price target down from 3,400p to 3,360p.
The bank has reinstated its rating on National Grid PLC (LSE:NG.) at 'overweight' and updated water companies as they go into regulatory review.
Pennon Group PLC (LSE:PNN, OTC:PEGRY) is its favoured water utility, rated 'overweight', with a price target of lowered from 1,200p to 1,090p.
But United Utilities Group PLC (LSE:UU.) has been downgraded to 'equal weight' from 'overweight' with a 1,290p price target down from 1,310p.
The broker said it sees “a compelling entry point for UK water utilities in general and Pennon Group in particular”.
It noted the valuation gap between United Utilities and Severn Trent has closed, hence the switch there.
Barclays said asset growth with both energy transition and water trilemma is increasing to a high single-digit percent CAGR, a significant increase from the current run rate.
It thinks allowed base returns will need to rise to levels not seen since the mid-2000s while achieved returns should remain above allowed baseline for UK regulated companies.
Current valuations do not reflect the reality of allowed return rate transition, the broker believes.