Pennon Group PLC (LSE:PNN, OTC:PEGRY), United Utilities Group PLC (LSE:UU.) and Severn Trent PLC (LSE:SVT)'s business plans present an “unprecedented opportunity for multi-year growth”, according to Jefferies.
“This, alongside a potential for reasonable investment returns, outweighs our previous concerns about political/regulatory risk,” the broker said in a note to clients today.
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, it added.
The broker has double upgraded Pennon and Severn Trent to 'buy' from 'underperform' and moved United Utilities to 'buy' from 'hold'.
Shares in Pennon rose 1.7%, United Utilities climbed 1.2% and Severn Trent were up 1.7%.
On Severn Trent, Jefferies has increased its price target to 2,960p from 2,100p.
“Our view is that the recent £1 billion equity raise has bolstered their balance sheet significantly, making them well placed to deliver their PR24 business plans,” it said, while it thinks it can maintain its current dividend policy too.
On United Utilities, the broker increased its price target to 1,200p from 960p.
“We see UU's business plan as offering sector-leading nominal RCV growth, with projected CAGR of 8% across the next regulatory period,” Jefferies said.
It thinks United Utilities can maintain healthy levels of gearing and its current dividend policy.
The broker doesn’t see a need to raise equity funding even though it is a scenario that is presented in their business plan.
On Pennon, the price target is lifted to 850p from 700p.
“We believe Pennon’s 2025-30 business plan offers an attractive 7% p.a. nominal growth in regulatory capital value,” it said.
It thinks the proposed plan, if accepted by Ofwat, is financeable without the need to raise new equity or a dividend cut.
Jefferies said 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 process and won't be finalised until December 2024, it added.