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Deutsche Bank positive on UK water sector

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Deutsche Bank today highlighted Severn Trent (LON:SVT) and United Utilities (LON:UU) as its top picks in the UK water sector, of which the investment bank said it retains a “broadly positive” view.

“We see returns above cost of capital, with the main threat to this a significant fall in inflation,” said the bank in a research note published today. “The sector trades still at relatively modest premia to RAB {regulatory asset base] compared to historic trading levels and prior transactions we’ve seen for UK regulated assets.”

The bank said it was retaining ‘buy’ recommendations on United Utilities and Severn Trent, and a ‘hold’ on Pennon.

Deutsche added that it believed United Utilities looked particularly cheap. It values the firm’s shares at 760 pence each through sum-of-the-parts (SOTP) analysis. “We value United Utilities at a 16.3% RAB premium, reflecting the spread between allowed returns and our estimate of the actual cost of capital, and taking into account expected growth in its regulatory asset base,” it said.

The key risk for United Utilities, according to Deutsche, is the outlook for bond yields and inflation, with higher real bond yields and lower RPI inflation negative.

For Severn Trent, Deutsche has set a SOTP target price of 1,670 pence. It values its shares at a 15.2 percent premium to RAB. Again, a key risk for the shares is the outlook for bond yields and inflation.

By 3pm today, United Utilities’ shares were up marginally at 613.5 pence each (an increase of 0.41 percent), while Severn Trent’s share price was 0.4 percent higher at 1,502 pence.

 

 

Quick facts: United Utilities Group PLC

Price: 1012 GBX

LSE:UU.
Market: LSE
Market Cap: £6.9 billion
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