Investec cuts water company price target due to nationalisation threat

Investec said its new view of 'fair value' for the sector reflects the risk of renationalisation and dividend cuts, downgrading United to 'sell' from 'hold' as it cut its target price to 740p from 1000p given the potential of 10-25% reduction in the dividend per share in the 2020/21 financial year.

Investec maintained its 'hold' recommendation on Severn Trent and Pennon but cut its target price to 2,010p from 2470p and to 760p from 880p, respectively.

"With the Labour Party gaining momentum, the threat of nationalisation is no longer academic," said analyst Roshan Patel, adding that public perceptions of lax regulation remain pivotal.

"The voting public focus is on ‘excessive’ dividends and leverage, corporate governance, and lack of ownership and tax transparency."

He also highlighted the potential for history to repeat itself: "In 1997, the Labour government justified a one-off tax on privatised utilities on the basis of the perceived excess returns accrued to equity investors following under-pricing at privatisation, and lax price control regulation. Rent extraction under renationalisation should be expected, in our view, potentially paying no more than the value of the regulated capital value (>30% downside to the estimated sector equity value)."