viewSevern Trent

RBC Capital slashes forecasts for water companies on upcoming regulatory changes

Ofwat’s Price Review 2019 is likely to limit how much extra money companies can earn through outcome delivery incentives, while AMP7 will likely require them to invest heavily into infrastructure

water reservoir
Trying to eke out some growth in highly-regulated markets is never an easy challenge…

RBC Capital has slashed its forecasts for UK water companies with a wave of upcoming regulatory changes set to dent their top- and bottom-lines.

Asset Management Period 7 (AMP7) is due to run from 2020 to 2025, and all the major water companies are in the final stages of outlining their business plans.

Cost inflation > income growth?

Analysts at the mid-tier Canadian bank expect Severn Trent PLC (LON:SVT), United Utilities Group PLC (LON:UU.) and Pennon Group plc (LON:PNN) to all see their return on regulatory equity employed (RoRE) fall when the new regulations come in.

That is because AMP7 will focus heavily on innovation – always an expensive task – to meet increasing demand and the growing importance of protecting the environment.

On top of that, Price Review 2019 (PR19) is likely to limit revenues as well and curb how much extra cash the companies can generate through outcome delivery incentives (ODIs).

RBC Capital’s preferred pick is still Severn Trent, although it has downgraded the firm to ‘outperform’ from ‘top pick’, while it has also chopped its price target to 2,250p from 2,650p.

Severn Trent remains our preferred water name as we believe that there is strong upside to our current numbers as a result of further outperformance through ODIs, which we currently give no value to in AMP7,” read a note to clients.

“However, in line with peers we curb our view on outperformance post AMP6 and as such, we downgrade to ‘outperform’.”

Pennon the least loved

The bank maintained its ‘outperform’ rating on United Utilities, although its price target was also trimmed to 950p from 1,150p.

“On outperformance we still see UU as the most disadvantaged by Ofwat’s current framework and we do not expect the playing field to level overnight.

“However, UU appears to be significantly undervalued and a strong ‘value play’ for investors due to unjustified perceived risks on its dividends.”

RBC is most bearish on Pennon, which it has downgraded to ‘sector perform’ from outperform’, while its target has also been reduced to 800p (from 925p). It said the company is “broadly fully valued”.

Quick facts: Severn Trent

Price: 2390 GBX

Market: LSE
Market Cap: £5.7 billion

Add related topics to MyProactive

Create your account: sign up and get ahead on news and events


The Company is a publisher. You understand and agree that no content published on the Site constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is...


Market report: UK lockdown fears sink FTSE into a sea of red

The FTSE is in the red this Monday morning with fears prime minister, Boris Johnson, is reportedly considering a two-week mini-lockdown in England in a bid to stem the spread of the virus. We’ll find out later on this week. As a consequence - British Airways parent company, IAG, (LON:IAG) is...

34 minutes ago

2 min read