Investing.com – Investment risks around listed UK water companies have eased “materially” since a key regulatory decision last month to raise water bills in England and Wales, according to analysts at Morgan Stanley (NYSE:).
In a note to clients, analysts led by Sarah Lester added that these names are trading below their long-term historical multiples, “creating a uniquely compelling buying opportunity.” Analysts said they “prefer” the water companies Severn Trent (LON:) i United Utilities (LON:), and the former in particular received their support as the “best choice” in the sector.
Severn Trent shares have fallen by more than 7% over the past one year, while United Utilities’ share price has fallen by more than 8% over the same period.
The comments come after UK water regulator Ofwat announced in December that it would allow a bigger jump in water bills than it had previously suggested. The decision will see an average increase before inflation of 36% — the equivalent of £31 a year over five years — for those firms, which is higher than the 21% increase originally proposed by Ofwat, but below the average of 44% they demanded companies.
Ofwat also said it had given these companies the chance to invest £104bn in improving reservoirs, storm drains and pipes.
Private water companies have recently faced scrutiny amid scandals in Britain over sewage discharges into rivers and seas, with the companies accused of neglecting infrastructure investment in favor of dividends and management bonuses.
While Ofwat said it would hold companies to account, the sector said the regulator aimed to keep bills low and was asking the debt-ridden industry to fund overhauls of pipes and treatment plants.
Still, the decision marks a “significant de-risking event for the sector,” Morgan Stanley analysts said, arguing that it provides “valuable revenue visibility [and] capital investment allowances for the next five years.”
(Reuters published the report.)
