Top US bank JP Morgan has turned more positive on the water sector, suggesting that all of the headwinds are now in the prices of the listed utilities.
Low regulatory visibility and expectations of less attractive proposed returns compared to electricity networks have been some of the issues for investors, JP Morgan believes the market underappreciates certain positives.
This is especially the case for United Utilities and Severn Trent, says JPM, with their long track records of outperforming regulatory allowances set to continue.
“We expect the upcoming regulatory determination on July 11 to solidify the growth story for the sector, with more investment needed for environmental performance to improve.
"We would play the UK water stocks through United Utilities Group PLC (LSE:UU.), which is upgraded to 'overweight', where we see the most upside, and where we see a higher growth profile and better balance sheet than peers."
Severn Trent is upgraded to neutral, trading at a higher premium to RCV than UU despite a lower expected growth profile while Pennon, also neutral, is unlikely to outperform due to a stretched balance sheet, poor environmental performance and ongoing regulatory investigations.
Ofwat’s regulatory draft determinations on July 11 are likely to be a catalyst, as JP Morgan expects the regulator “to recognise that these companies’ business plans are high quality and ambitious, providing clarity to drive near-term outperformance”.