Broker snap: Investec downgrades Severn Trent after recent spike

30th Apr 2012 10:52

As part of its review of the utilities sector, Investec has downgraded its rating on water group Severn Trent from buy to hold and cut its target price from 1,718p to 1,664p.Investec says that after an initial underperformance at the start of 2012, the utilities sector has outperformed the market by 2% in the year-to-date. With most of the stocks reporting finals results or quarterly trading updates in the coming weeks, the broker says that the final dividends season "should augment this performance"The broker also foresees more M&A activity in the sector: "International Power is now on its way out, and rumours of further takeovers abound in the sector. We believe that the sector will undoubtedly continue to attract overseas bidders, given the relatively stable UK regulatory regimes and the openness to allowing acquisition. However, we do not see any further takeovers as imminent," said analyse Angelos Anastasiou.In regards to Severn Trent, Investec says that the recent share price spike has been driven by bid speculation, something which it does not necessarily see as likely.While he believes that Severn Trent remains "well-placed for the medium term", Anastasiou highlights that the shares have risen by 13-14% since only April 5th, meaning that the stock is no longer cheap."We are downgrading our recommendation to hold from buy on valuation grounds while noting the outside possibility of a bid."The stock was trading 0.82% lower at 1,688p by 10:48 on Monday morning.BC