JPMorgan upgrades Pennon; U.K. water stocks rise on regulatory outlook

Published 22/07/2025, 12:10
© Reuters.

Investing.com -- Shares of U.K. water utilities rose Tuesday after JPMorgan upgraded Pennon Group (LON:PNN) and reiterated “overweight” ratings on Severn Trent (LON:SVT) and United Utilities (LON:UU), citing improved regulatory clarity and earnings prospects.

Pennon gained after being raised to “overweight” from “neutral,” with its price target increased to 600p from 500p. The stock closed at 526p on July 21. 

JPMorgan said the company’s balance sheet had been de-risked following a rights issue and current pricing reflects no outperformance.

The bank values Pennon at a 7.5% premium to its forecast March 2027 regulated capital value (RCV) of £7.04 billion.

Severn Trent, JPMorgan’s top sector pick, was reaffirmed at “overweight” with a 3,050p target, implying a 12% upside from its last close at 2,722p. 

The bank cited Severn Trent’s earnings outlook and consistent track record of outperformance on outcome delivery incentives. The stock is valued at a 20% premium to its 2027 RCV estimate of £16.95 billion.

United Utilities (OTC:UUGRY) was also maintained at “overweight” with a 1,300p target, compared with its closing price of 1,140p. 

JPMorgan applied a 10% premium to its forecast 2027 RCV of £18.05 billion, noting potential for continued operational and financial outperformance.

The rating actions followed the publication of the Independent (LON:IOG) Water Commission’s final report. 

The U.K. government has agreed to implement five recommendations, including the creation of an independent regulator, a shift to regional catchment-based planning, and guarantees of stable returns for companies meeting obligations.

A white paper with the government’s full response is due this autumn, along with a transition plan and interim strategic policy statement. 

A Water Reform Bill is expected by the end of 2026. Ofwat will remain in place during the transition.

JPMorgan said the sector’s valuations remain undemanding. Severn Trent trades at a 12% premium to its FY27 RCV, United Utilities at 4%, and Pennon at 2%. This compares with a historical sector average of 10%-15%.

Earnings forecasts were updated across all three companies. For United Utilities, FY27 adjusted EBIT was raised by 9.4% to £1.14 billion and EPS by 10.9% to 106.6p. 

Severn Trent’s EBIT was revised down 5.1% to £948 million, while EPS was lifted to 196.8p. Pennon’s FY27 EBIT remained unchanged at £396 million, and EPS was revised up slightly to 35.7p.

JPMorgan estimates 14% upside for both Pennon and Severn Trent, and 12% for United Utilities, supported by a regulatory framework that passes through higher capital costs and inflation to customers while enabling outperformance.

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