Investors should buy Pennon on takeover hopes, says Deutsche

4th Jun 2014 11:44

The prospect of another wave of water industry takeovers should tempt investors to buy shares in South West Water (SWW) owner Pennon, says Deutsche Bank.Pennon and other listed UK water stocks offer attractive returns compared to low-risk UK and US regulated peers such as National Grid, the German broker said."We also think there is the potential for more bids once the 2014 review completes, which will set prices through to 2020," Deutsche added.Pennon, United Utilities and Severn Trent are the only remaining UK listed water utilities after others such as Northumbrian Water were bought out by infrastructure investors and pension funds.On Tuesday, Pennon said a near-11% rise in profits to £162.5m at regulated water business SWW drove a 9.1% increase in group profits in the year to March 31st to £207.3m.Deutsche has a 'buy' recommendation on Pennon with an 830p price target.Pennon's shares offered a prospective annual economic return of about 8%, compared to National Grid and US utilities offering typical returns of about 6.5%, it said."Although we still worry there may be long-run overbuild of energy-from-waste capacity, short-term returns should be very attractive from these projects and drive strong group earnings growth in the next three years," the broker added.Shares in Pennon rose 0.5p to 760.5p by 12:04 in London.PW