With the headwinds seen to be fading for the UK’s listed water companies, JPMorgan Cazenove has upped its forecasts, valuations and share price targets for the sector’s big players.
In recent weeks, the regulator Ofwat’s price controls have been published for the next five years and Severn Trent PLC (LON:SVT) and United Utilities Group PLC (LON:UU.) revealed their five year dividend policies.
Allied to the general election result removing the threat, for a few years at least, of Labour’s renationalisation plans, the recent weeks have put “significant regulatory and political risks behind us”, analysts at the investment bank said.
This led to an upgrade for Severn Trent to ‘neutral’ from ‘underweight’ as its share price target was hiked to 2,550p from 2,000p.
Pennon Group PLC (LON:PNN), whose shares have been the strongest performer in the sector partly due to speculation that it will sell off its Viridor arm, was kept at ‘neutral’ but its target was lifted to 1,125p from 760p.
The top pick in the sector is UU, where Cazenove has an ‘overweight’ rating and upped its price target to 1,100p from 900p, saying “we see the deep discount to the peer group fading over time”.
After the Ofwat final deadline passed, JPM’s updated estimates move “considerably higher” than consensus across the coming three years, with the price controls resulting in “a modest reduction in allowed returns”.
The analysts noted that the final determination from Ofwat differed “markedly” the initial drafts, with a final profile of cash flows that “effectively eliminates the temporary cash flow weakness in the early years of the determination, providing a smoother dividend payout trajectory”.
UU and Severn Trent will begin the new regulatory period with dividends growing at least inline with CPIH inflation, with Pennon saying last week that it will update the market at its full year results in June.