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Stock Watch: Severn Trent & United Utilities

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

When Christine McGourty steps into her new role as chief executive of Water UK, the country’s biggest water trade body, will she step into an industry that’s on the brink of nationalisation?

Her appointment which starts on 16 December comes just four days after the General Election and Labour has said that if it wins it will nationalise the UK’s private water companies.

The trickle-through effect of the possible nationalisation of the water giants has already been evident in their share prices. 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.

The big worry is that if Labour is successful 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 the water sector’s problems are far from over.

The water companies are 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.

Back at the relative calm of the day-to-day business end though, life for the water companies appears to be shaping up quite well. In July, Severn Trent (SVT), 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 1 April to 17 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, but also able to see upside potential, has downgraded its investment rating to neutral from outperform, but has raised its price target 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 £19.20. 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 Group (UU.). 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.

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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