Ofwat’s draft consultation yesterday on how the UK Government’s Bill on water companies would be implemented contained little that was unexpected, says UBS.
Much is being done already, it adds, for example with management waiving pay and introducing greater responsiveness to customers, though UBS suggests the rules are onerous to what is already being done.
The industry focus is already on delivering the measures to prevent storm overflows and is about 2½ years into a capex programme (where the bulk is done over 12½ years) to get storm overflows to very low levels.
From an investment viewpoint, UBS reiterated it has a hedged view of the sector by market cap with United Utilities (PT 1,180p) a buy on a 9% premium to RAB [regulatory asset base] and Severn Trent (PT 2,390p) a sell on a 21% premium.
South-West Water owner Pennon (PT 890p) is its top pick on a 1% RAB discount.
“We see the draft review as a good starting point to trend up towards final determination.
“But on the review, as it stands, it is difficult to see companies generating economic profit or earning more than a c8% nominal equity IRR.”