The UK water companies, Severn Trent PLC (LSE:SVT), Pennon Group PLC (LSE:PNN, OTC:PEGRY) and United Utilities Group PLC (LSE:UU.), still only offer "unattractive" proposed returns and share prices now reflect investor concerns, says JPMorgan.
This follows the sector publishing their business plans on Monday, which was summed up by the investment bank's analysts as showing that "there is a growth story for the sector, with more investment needed for environmental performance to improve".
The analysts said higher proposed allowed returns would make the sector more attractive to the stock market,
"We do not expect an update on this front until summer 2024, nor do we take it for granted that the regulator will be generous," they said.
Compared to other listed utilities, UU shares have performed in line over the past 15 months, while SVT has underperformed by around 10 percentage points and PNN by around 30 points.
Offputting factors for the investment bank's analysts are low regulatory visibility, unattractive proposed returns compared to electricity networks, and the dividend yield spread to 10-year UK gilts remaining at a 10-year low.
JPM is "incrementally more positive" on UK water companies, but believes the risks are "adequately reflected in the share prices today", upgrading SVT to 'neutral' from a previous negative stance after its shares fell below the bank's updated 2400p price target.
"We remain on the sidelines in the coming months as we expect the macro backdrop to be the main driver of share price performance, and do not see the risk/reward as attractive either to the upside or downside at this stage."
Top picks in utilities for JPM remain stocks with UK power generation exposure, such as SSE PLC (LSE:SSE), Centrica PLC (LSE:CNA), Drax Group (LSE:DRX) and UK electricity networks SSE and National Grid PLC (LSE:NG.).
SSE is "top pick" in the wider UK utilities space for the bank.