UK water sector “materially de-risked” after regulator decision

Investing.com – Investment risks surrounding listed UK water companies have lessened “materially” since a key regulatory decision last month on an increase in water bills in England and Wales, according to analysts at Morgan Stanley (NYSE:).

In a note to clients, the analysts led by Sarah Lester added that these names are trading below their long-term historical multiples, “creating a uniquely compelling buying opportunity.” The analysts said they “prefer” water companies Severn Trent (LON:) and United Utilities (LON:), with the former in particular receiving their backing as a “top pick” in the sector.

Shares in Severn Trent have fallen by over 7% in the past one-year period, while United Utilities’ stock price has slipped by more than 8% during that time.

The comments come after UK water regulator Ofwat announced in December that it would allow a larger jump in water bills than it had previously proposed. The decision will see an average increase before inflation of 36% — equal to 31 pounds per year over five years — for these firms, up from the 21% rise initially put forward by Ofwat but below the 44% average requested by the companies.

Ofwat also said it had given these businesses the opportunity to invest 104 billion pounds in improving reservoirs, storm overflows and pipes.

Private water companies have faced recent scrutiny amid a scandal in Britain surrounding the dumping of raw sewage into rivers and seas, with these firms being accused of neglecting infrastructure investments in favor of dividends and management bonuses.

While Ofwat has said it will hold the companies to account, the sector has said the regulator is aiming to keep bills low and asking the debt-ridden industry to fund an overhaul of pipes and treatment plants.

Still, the decision marks a “material de-risking event for the sector,” the Morgan Stanley analysts said, arguing that it provides “providing valuable visibility for revenues [and] capex allowances for the next five years.”

(Reuters provided reporting.)