JPMorgan upgrades Severn Trent to ‘neutral’

The bank said it was "incrementally more positive" now on the UK water sector after underperformance since it turned cautious last June.

"Since that time, United Utilities has performed in line with the FTSE Utilities index, while Severn Trent has underperformed by circa 10ppt and Pennon by c30ppt. We still see low regulatory visibility at this point in the regulatory cycle, unattractive proposed returns compared to electricity networks, and the dividend yield spread to 10-year UK gilts remaining at a 10-year low.

"However, we believe that these risks are adequately reflected in the share prices today, with the listed companies trading broadly around their RCV (regulatory capital value)."

JPM said the business plans published on Monday show that there is a growth story for the sector, with more investment needed for environmental performance to improve.

"In our view, the missing link is an improvement on proposed allowed returns - we do not expect an update on this front until summer 2024, nor do we take it for granted that the regulator will be generous.

"We upgrade Severn Trent to neutral as the company now trades below our updated 2,400p rice target." It previously rated the shares at ‘underweight’ with a 2,425p price target.

"We remain on the sidelines in the coming months as we expect the macro backdrop to be the main driver of share price performance, and do not see the risk/ reward as attractive either to the upside or downside at this stage."

JPM’s top picks remain stocks with UK Power Generation exposure - SSE, Centrica, Drax - and UK electricity networks such as SSE and National Grid. Its top pick is SSE.