Thursday, 14 February 2013

Market round-up: Experts fear Ofwat could drain life out of water companies - Analysis & Features


Deal-thirsty overseas buyers like the look of the UK’s water companies but new layers of regulation next year could lead to a deal drought.

Today water experts warned that looming regulation would put a dampener on deals and the high share prices currently propped up by bid chatter would fall.

JPMorgan’s Edmund Reid and Chris Gallagher say: “Despite the high level of uncertainty, water valuations remain full, we believe helped by recent press comments regarding potential bids.”

They did admit that with a “buoyant corporate credit market” they couldn’t “rule out M&A” but think “the closer we get to Ofwat’s 2014 price review the less likely a bid becomes”.

Reid thinks that although the “demand for UK water assets from financial buyers” is evident in recent deals such as Sumitomo’s purchase of Sutton & East Surrey. This demand will wane as the water regulator’s 2014 price review floats into view, he claims.

Reid and Gallagher are so sure of the adverse effects of regulation — including the Water Bill due before Parliament this year — that they have slashed the rating of their “favoured UK water utility”, Pennon.

They now rate Pennon neutral or hold — down from Buy — but have slightly increased their share price target to 695p. The share price of the water and waste group trickled down 8.5p to 670.5p today.

JP Morgan rates Severn Trent, currently down 21p to 1591p, as neutral with a share price target of 1520p.

Vague rumours that United Utilities is a bid target have been doing the rounds for months and have inflated its share price. But JP Morgan rates the stock neutral with a share price target of 720p, and the shares slipped 6p today to 724p.

Plans for cost cutting at Tanzania-focused miner African Barrick Gold sent its shares to the bottom of the mid-cap index today, down 29.6p to 311.4p. Sale talks for the miner, initiated by its parent company Barrick Gold, collapsed in January and today it said it would now focus on cutting costs. It said earnings for 2012 were down by 39%.

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