Investing.com - RBC Capital Markets has taken a look at the UK Water sector, and is optimistic as it is now entering the period for peak visibility.
UK water should now benefit from a period of enhanced regulatory certainty, alongside a return that is attractive in the context of the wider EU regulated space, analysts at RBC Capital Markets said, in a note dated Feb. 4.
“Furthermore, we think earnings growth is material over the coming years and we believe that a lack of near term balance sheet risk is a key positive,” RBC said.
RBC has upgraded its stance on Pennon (LON:PNN) to “outperform”, from “sector perform”, while remaining at “outperform” for United Utilities (OTC:UUGRY) and “sector perform” for Severn Trent (LON:SVT).
“We forecast average nominal RoRE [return on retained earnings] of 8%-9% over the course of AMP8 [Asset Management Period 8 - a regulatory framework for water companies in England and Wales, which runs from April 2025 to 2030] for the listed water names, and see base returns screening well versus the wider EU sector average,” RBC added.
Financing will likely continue to play its part in the overall outperformance mix, albeit to a lesser extent than the high inflation periods of AMP7.
The sector continues to hit the headlines namely around Thames Water and environmental investigations/challenges. An expected upcoming decision on Ofwat’s environmental investigation should be helpful in this regard, whilst the bid deadline for Thames Water has been set for Feb. 10.
“We expect both of these points will move the narrative forward, although acknowledge that we expect continued sector attention in the short term,” RBC said.