Hello and welcome to Stock Watch Live.
When Christine McGourty steps into her new role as chief executive of Water UK, the country’s biggest water trade body, will she inherit an industry that’s about to be re-nationalised?
Her appointment which starts on the 16th of December will be just four days after the General Election.
If Labour wins on the 12th it’s said it will nationalise the UK’s private water companies. And companies like United Utilities and Severn Trent, which are both due to post half-year results this week, are firmly in Labour’s sights should that happen.
The trickle-through effect of the possible nationalisation of the water giants has already been evident in the share prices of these two companies.
Before nationalisation was mooted, shares in the companies traded at an average of 20 times forward earnings. As the Labour party’s chances of success have see-sawed, shares in the likes of Severn Trent and United Utilities have reacted accordingly. The recent rally following polling data showing that Labour’s popularity was waning, has taken them back up by a tenth.
But worries are that if Labour is successful at the Election and if nationalisation were to take place at regulated book value, as has been proposed, an additional £5 billion could be wiped off share prices, according to analyst at broker Bernstein.
Even if Labour doesn’t win next month’s election next month though its problems are not over. The water industry is still facing a squeeze from politicians and regulators.
Proof of that came when the regulator, Ofwat, stunned the water industry over the summer, when it rejected all but three leading suppliers’ business plans for 2020-2025.
It’s actions, which also included demanding that water companies pay their debts faster, become more efficient and treat customers better, sparked fury among water companies and led to accusations from major investors in the industry that the regulator was becoming politicised.
And the battle is far from over, with Ofwat due to issue its final price settlements with major water companies next month.
Back at the day-to-day business end, life appears to be shaping up better. In July, Severn Trent, which is due to post half-year results on Thursday, said it had made a 'good' start to the new financial year and expected to deliver a full-year result in line with prior guidance.
Giving a trading update for the period from the 1st of April to the 17th of July, the company said it remained on track to deliver at least £25 million in customer outperformance payments this year.
It said it had also generated 123Gwh from its own renewable sources, equivalent to 52% of its energy needs, positioning the company on the right run rate to exceed its 50% target for the year.
And that, it was keen to stress, is an important step in its triple carbon pledge for 2030, which is 20 years ahead of the latest government commitment.
Broker Credit Suisse, clearly cautious about the political risks Severn Trent faces being seeing upside potential, has downgraded its investment rating to neutral from outperform, but has raised its price target to by 60 pence to £21.60.
Jefferies International has also downgraded its investment rating on Severn Trent, from buy to hold and cut its price target from £23.40 to £19.20p. More cautious still is Deutsche Bank, which has maintained its hold rating and set a £20.50 price target.
Before we hear from Severn Trent though it’s the turn of United Utilities. It too has said it expects to post higher revenue and profit in the first half of its financial year.
HSBC has downgraded its investment rating on United Utilities to reduce, from hold, and cut its price target from 860 to 760 pence.
Its results are due out on Wednesday.
And that’s it from me for this week. To follow these and the rest of the companies reporting in the week ahead, go to the Markets & Insights section at Fidelity.co.uk.
See you next time.