United Utilities and Severn Trent drop on RBC downgrade

Severn Trent and United Utilities were under the cosh on Wednesday after RBC Capital Markets downgraded both stocks as it took a look at the UK water sector.

The bank cut Severn Trent to ‘underperform’ from ‘sector perform’ on valuation grounds but lifted the price target to 2,300p from 2,200p. RBC said it has updated its return on regulated equity calculation and valuation approaches such that the target price rises, but with -5% implied total return, it downgraded the rating.

“We believe SVT will continue to be one of the better-held UK water stocks by investors. Its management presents SVT’s investment case strongly and largely receives a positive feedback from those who have met them.”

RBC downgraded United Utilities to ‘underperform’ from ‘sector perform’, also on valuation, noting 4% implied total return, but lifted the price target to 1,000 from 975p.

The Canadian bank said its ratings on both stocks reflect its view that their current trading valuation implies a total return that compares unfavourably to the rest of the European utilities sector.

RBC highlighted a preference for outperform-rated Pennon, which it said offers a “one-stop shop for investors seeking exposure to various long-term themes, including water/waste, safety amidst Brexit, macro recovery (relative to SVT/UU), income-play, earnings growth and UK Water M&A.”

RBC lifted its price target for Pennon to 950p from 925p.

At 1000 BST, SVT shares were down 1.8% to 2,450p, United Utilities was down 2.4% to 970.50p, and Pennon was down 1.7% to 878.50p.