16th Oct 2023 13:37
(Alliance News) - Jefferies turned positive on UK water utilities, believing recent business plans will ease regulatory worries for the sector.
Severn Trent PLC and Pennon Group PLC got double upgrades to 'buy' from 'underperform', while United Utilities Group PLC was lifted to 'buy' from 'hold'.
"[Pennon, Severn and UU's] business plans present an unprecedented opportunity for multi-year growth. This, alongside a potential for reasonable investment returns, outweighs our previous concerns about political/regulatory risk. In addition, the substantial step-up in investment is likely to improve sector performance on environmental issues, all the while bills appear to be manageable," analysts at Jefferies commented.
The trio earlier in October set out plans to largely rave reviews from stock market investors.
Severn Trent, which supplies water across the Midlands and Wales, outlined plans for GBP12.9 billion in spending across a five-year period.
The plan includes GBP5.0 billion of investment focused on enhancing capacity and service beyond current levels.
Severn Trent said it would be a "sustainability-led" plan including a 30% reduction in storm overflow spills, a 30% reduction in pollution, and a 16% reduction in leakage.
United Utilities, which supplies water and wastewater services in North West England, outlined a "hugely ambitious" plan for GBP13.7 billion in total expenditure across the period. The plans will support 30,000 jobs, of which 7,000 are new, United said.
The plan aims to safeguard supplies for three million households, and reduce combined sewer overflows by 60% in the decade to 2030. It also targets a 25% improvement in avoiding pollution incidents across the five-year period.
Pennon Group's South West Water also submitted its five-year business plan to the regulator. It comprised a GBP2.8 billion package of capital investments, which will target storm overflows and pollution, water quality and resilience, delivering net zero and environmental gains, and keeping bills affordable for customers.
"Our robust balance sheet underpins our ambition," said Chief Executive Officer Susan Davy.
Jefferies believes a GBP1 billion equity raise by Severn Trent bolstered its balance sheet "significantly".
The United Utilities plan could offer the firm sector-leading growth, meanwhile, Jefferies added.
At Pennon, the investment bank believes the plan can be financed without the need to go cap in hand to investors, nor cutting the dividend.
Though now having a supportive assessment of the sector, Jefferies added that regulatory risks to the UK water sector remain.
Analysts at Jefferies explained: "We reiterate that regulatory risks still remain, including the looming UK elections where poll-leading Labour has been vocal in its criticism of the water sector. The business plans also still have to undergo Ofwat's regulatory and won't be finalised until December 2024."
Severn Trent shares rose 3.2% and United Utilities 2.5%, among the best FTSE 100 performers. FTSE 250-listed Pennon added 3.3%, the second-best performer there.
By Eric Cunha, Alliance News news editor
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