In view of what it sees as rising political risk and tougher regulatory rulings, Deutsche Bank has watered down its forecasts and share price targets for United Utilities Group PLC (LON:UU.), Severn Trent PLC (LON:SVT) and Pennon Group plc (LON:PNN).
Water regulator Ofwat last month published its draft regulatory determinations for the trio of listed water companies, setting out the prices the companies can charge over 2020-25.
Deutsche said the “slightly more conservative” estimates for both allowed returns and outperformance had led it to lower its equity return estimates by an average of 0.5%, although the prices could still change modestly if Ofwat revised its view.
Ahead of full-year results over the next fortnight that “should feature double digit earnings growth for each stock”, the analysts trimmed their forecasts as they “believe that lower bond yields make a modest cut to the allowed return more likely and with Ofwat’s incentive packages appearing slightly tougher than expected”.
A fundamental ‘hold’ rating was maintained on the three stocks, though Severn Trent has been added as a ‘sell’ to a short-term portfolio of ideas for Deutsche clients to reflect that “we worry that political risks are rising”.
Recent reports indicated that a Labour government would not expect to pay any premium to shareholders and would need to pay less than £15bn to renationalise water firms, based on calculations by rating agency Moody's of the book value of the 15 English water companies' shareholder equity.
Although cuts to the return estimates are moderate they feed through to 1-3% drops in the German bank’s target prices, with UU cut to 830p from 850p, Pennon to 780p from 790p and Severn Trent to 1,950p from 2,000p.
Shares in United Utilities were down almost 4% on Thursday afternoon to 772.2p, while Severn Trent's and Pennon's were both more than 3% lower at 1,904.5p and 702.69p respectively.