It is time to stop buying Severn Trent PLC (LSE:SVT) shares, that's according to investment bank Jefferies, which has downgraded the water utility to 'Hold' after a roughly 10% share-price rise since January, which analysts claim leaves less room for upside against an increasingly uncertain political and regulatory backdrop.
Analysts retained a broadly unchanged 3,220p price target, implying an 11% 12-month total shareholder return, but said greater scrutiny of the water industry and uncertainty over longer-term reforms had weakened the risk-reward balance.
“Political uncertainty is a key overhang for the UK water sector,” the bank said in a note, pointing to debate over greater public control of utilities and uncertainty surrounding proposals from the Independent Water Commission, including a possible unified regulator.
Potential additions to companies’ AMP8 investment programmes offer some upside. Jefferies estimates regulatory reopeners could add around 5%-10% to sector regulatory asset base growth by 2030. However, “the scope, economics, and funding remain uncertain”, particularly for Severn Trent and Pennon. Ofwat’s approach to revenue recovery and returns on additional capital expenditure will determine how quickly companies can commit funding, with further guidance expected by mid-August.
Jefferies maintained its Hold rating on United Utilities and increased its target by 2% to 1,350p, reflecting a higher forecast return on equity following recent results and guidance.
Pennon also remained at Hold, although the target was cut 15% to 500p. Jefferies highlighted operational penalties, below-target regulated returns and a tighter balance sheet, forecasting regulated-business gearing of around 67% during AMP8.
