BNP Paribas Restarts Coverage of UK Water Utilities
BNP Paribas has relaunched its analyst coverage of the United Kingdom water sector, focusing on Pennon Group, Severn Trent and United Utilities Group. Analyst Joy Xu assigned a “+” rating to United Utilities and Pennon, and an “=” rating to Severn Trent, and identified United Utilities as the top pick.
The broker forecasts a turning point for the sector once the current political noise subsides, citing improving underlying fundamentals and an increasingly supportive regulatory landscape. It notes that recent negative press and evolving UK politics have eroded investor confidence, but a major transformation is underway following the Cunliffe review and the government’s pledge to overhaul the industry. BNP Paribas does not view nationalisation as a plausible risk and expects volatility to ease in the coming months.
For United Utilities, BNP Paribas set a target price of 1,600 pence, which represents a 22 % upside from the closing price of 1,314 pence. The analyst highlighted a £2.5 billion capital‑expenditure programme that underpins an expected 10 % regulated cash‑flow (RCV) growth, comparable with National Grid. New regulatory mechanisms are expected to lift earnings in later years, with earnings‑per‑share estimates for fiscal years 2027‑2029 projected to be 9 %‑13 % ahead of consensus.
Pennon received a target price of 560 pence, implying a 20 % upside from its closing price of 466 pence. The broker described Pennon as poised for a strategic turnaround under new leadership after years of operational underperformance, and noted that the stock trades at a discounted enterprise‑value to RCV multiple versus peers, offering a rerating opportunity as operational improvements reduce fines and boost earnings.
Severn Trent was assigned a target price of 3,260 pence, indicating a 10 % upside from its closing price of 2,956 pence. While the company retains a leading position in environmental performance, BNP Paribas said this advantage is already reflected in its sub‑sector premium and therefore the firm remains on the sidelines until additional catalysts emerge.
Overall, BNP Paribas expects the UK water sector’s earnings trajectory to improve, driven by substantial capex, regulatory reforms, and the dissipation of political uncertainty.