Severn Trent PLC (LSE:SVT) and United Utilities Group PLC (LSE:UU.) have been given share price target upgrades by Deutsche Bank following new proposals for incentives within the water sector.
While the industry has “been worried that Ofwat's incentives in general may be skewed to the downside,” proposals are “incrementally positive”, Deutsche said in a note.
This comes after the regulator launched a consultation into outcome delivery incentives (ODIs), which see water firms paid or penalised based on performance, earlier this week.
Ofwat had said this would aim to create a “clear and consistent” framework for environmental incentives, given the current range of benefits on offer were “wide” and sometimes “unambitious”.
Deutsche noted the move “would average up the performance of the sector in the case that the median company was underperforming on ODIs”.
Estimates for returns from incentives for water companies were lifted as a result, with United Utilities and Severn Trent highlighted as those set to benefit by Deutsche.
United Utilities’ share price target was lifted from 1,060p to 1,130p, while Severn Trent’s was bumped up by 100p to 2,800p, with ‘hold’ ratings reiterated for both.
This would mark prospective gains of 2.2% for United Utilities and Severn Trent respectively from Wednesday’s close.