Thames Water’s problems might end up working in favour of other listed water utilities, according to analysts at UBS.
“We believe that the sector challenges of low returns on existing investments and leverage may work to the benefit of listed stocks which have listed equity vehicles and good operating performance,” it wrote in a note.
Pennon and Severn Trent collectively raised £1.18bn equity at 2% RAB (regulatory asset base premium) in the past six months, notes the broker.
UBS also expects real returns of around 4.1% to be allowed in the future, matching the CPI plus housing (CPIH) index, and lower thresholds for ODI (outcome delivery incentives).
“This could justify the c10% RAB premia we value the stocks at," said UBS. “We calculated that Severn Trent (Sell, PT 2,460p) is on a 12% premium to March 2025 RAB and Pennon (Buy, PT 890p) trading on -2%.”
Shares in Severn Trent were up 1% at 2,405p with Pennon up 1.3% at 641p on Wednesday.