Ofwat's rethink is good news for water companies, HSBC says

28th Aug 2018 10:09

(Sharecast News) - The water regulator's August position paper took a step back from an earlier more prescriptive stance, relieving concerns about Pennon, Severn Trent and United Utilities, HSBC said. Ofwat published a paper in April that said highly-geared companies should share financing gains with customers, companies' pay and dividends should be linked to customer service and companies should use common resilience scenarios when submitting plans to the regulator.These proposals were aimed at water companies that were not publicly traded but they made Ofwat's approach to regulation less predictable, HSBC said. Water companies have come under political scrutiny after accusations that payouts to management and owners took precedent over customer service and maintaining infrastructure.HSBC said Ofwat's August paper was a return to a more measured approach. The regulator will not intervene for companies that pay a yield of more than 5% of the equity portion of their regulatory asset base. However, it will require that companies with yields of more than 5% explain how customers' interests are served.The broker kept its 'buy' rating on Pennon and 'hold' ratings on Severn Trent and United Utilities. However, the analysts trimmed their price target for Pennon to 860p from 890p, edged up their target for Severn Trent shares to £21 from £20.80 and left United Utilities' unchanged at 820p."The three listed stocks under our coverage have been careful to align their capital structures with Ofwat's notional gearing. Being listed they have strong corporate governance with high levels of transparency."