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JPMorgan Cazenove pulls the plug on both Severn Trent and Pennon in a cautious water sector review

The US bank’s analysts downgraded ratings for both blue-chip Severn Trent and its mid-cap peer Pennon to ‘neutral’ from ‘overweight’ and reduced their target for United Utilities

Water flowing
The JPMorgan analysts pointed out that the risk-reward balance for the sector has become more finely balanced

JPMorgan Cazenove has cut both ratings and target prices for blue-chip water group Severn Trent PLC (LON:SVT) and its mid-cap peer Pennon Group PLC (LON:PNN) and reduced its target price for United Utilities PLC (LON:UU.) in a sector review.

The US bank’s analysts downgraded Severn Trent to ‘neutral’ from ‘overweight’ and reduced their target to 2,050p from 2,200p with the shares currently trading at 1,915.50p, down 2.3% on Monday’s close.

READ: Severn Trent expects to deliver a full-year trading performance in-line with previous guidance

They also cut Pennon to ‘neutral’ from ‘overweight’ and decreased their target to 780p from 800p with the shares currently trading at 713.60p, down 1.7% on Monday’s close.

For United Utilities, the analysts kept an ‘overweight’ stance on the stock but reduced their target price to 920p from 950, with the shares trading at 807.80p, down 1.4%.

In their note to clients, the JPMorgan analysts pointed out that the risk-reward balance for the sector has become more finely balanced following a 15% outperformance for the sector in the past year.

They noted that while the water stocks still trade below their historic valuation multiples, regulator Ofwat has yet to finalise the terms of capital costs, which could have implications for dividend policies. Ofwat’s draft decision on cost of capital ratios is due in July.

In addition, the analysts cautioned that “a general election looks the most likely route out of the Brexit impasse, bringing to the fore the threat of nationalisation under a future Labour government”.

Quick facts: Severn Trent

Price: 2583 GBX

LSE:SVT
Market: LSE
Market Cap: £6.15 billion
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