JPM predicts lower water sector returns ahead of Ofwat review


(Reuters) – JP Morgan forecast lower yields for water companies in England and Wales on Tuesday, saying industry regulator Ofwat’s upcoming price review in July will force them to be more efficient while meeting environmental goals.

Analysts at the U.S. brokerage firm said water companies will manage cost inflation well, though Severn Trent will face higher operating expenses, which will lead to a downgrade in “underweight” stocks. weighted” to “neutral”.

The Water Services Regulatory Authority (Ofwat) has said climate change, increased demand and affordability will be high on the priority list for its upcoming price review, which is due to be published. July 7.

“The regulator will challenge businesses to be more efficient while meeting environmental targets – this may require further reinvestment in coming years, limiting outperformance,” JPM analysts said in a note.

Ofwat said on Tuesday that Britain’s South West Water was being investigated for possible breaches involving its sewage treatment works, following action against Thames Water, Anglian Water, Northumbrian Water, Wessex Water and Yorkshire Water in March.

Surveillance of water companies has intensified in the past year after a government U-turn imposed legal controls on the amount of sewage the companies can discharge.

An earlier vote in parliament against such a move sparked a public backlash.

(Reporting by Aniruddha Ghosh in Bengaluru; Editing by Alex Smith and Devika Syamnath)