JPMorgan upgrades Severn Trent, United Utilities

JPMorgan Cazenove upgraded Severn Trent and United Utilities on Friday and placed both on ‘positive catalyst watch’ as it turned more positive on the UK water sector for the first time since it turned cautious in 2022.

The bank lifted Severn Trent to ‘neutral’ from ‘underweight’ and upped the price target to 2,700p from 2,450p. It upgraded United Utilities to ‘overweight’ from ‘neutral’ and pushed the PT up to 1,250 from 1,050p.

"We believe that the share prices now reflect headwinds including low regulatory visibility, and expectations of less attractive proposed returns compared to electricity networks," it said.

"However, we believe that the market underappreciates certain positives, especially for companies like United Utilities and Severn Trent, with a long track record of outperforming regulatory allowances, which we expect to continue.

"We expect the upcoming regulatory determination on July 11 to solidify the growth story for the sector, with more investment needed for environmental performance to improve."

JPM said it would play the UK water stocks through United Utilities, where it sees the most upside, and a higher growth profile and better balance sheet than peers.

As far as SVT is concerned, JPM said the risk/reward is more balanced, with the company trading at a higher premium to RCV than United Utilities despite a lower expected growth profile.

The bank maintained its ‘neutral’ stance on Pennon. "While the stock trades at a significant discount to peers, we believe the company’s stretched balance sheet, poor environmental performance and ongoing regulatory investigations mean the shares are unlikely to outperform," it said.

JPM said it was placing UU and SVT on ‘positive catalyst watch’ into the regulatory Draft Determinations on July 11, as it expects the regulator to recognise that these companies’ business plans are "high quality and ambitious, providing clarity to drive near-term outperformance".