Listed companies set to outperform in PR19

Macquarie tips Severn Trent and South West Water to lead the pack from 2020

Listed water companies are set to perform better under the next price review than their privately-held peers, according to analysis by Macquarie, which ranks Severn Trent and South West Water top out of 17 companies.

The analysis, which models Return on Regulated Equities (RoRE) and company finances under PR19, predicts that Severn Trent and South West Water will be able to maintain their dividends, but suggests the sector’s third listed company, United Utilities, will have to cuts its dividend by 10 per cent.

The document, published today (1 September), says: “Publicly listed companies perform very strongly relative to the industry as a whole. South West Water (Pennon) and Severn Trent are the top two performers and United Utilities is not far behind. Is there something in this? We think there might be – it seems statistically significant that out of 17 water companies… the publicly listed water companies are all in the top half and are in first and second place. We believe this could be down to corporate governance, where we believe the standard for governance is higher for publicly listed companies than private ones. Governance could be an area for exploration for incentives by Ofwat in our view.”

It adds: “We see a philosophical change in Ofwat (and Ofgem) going forward: that baseline RoREs are no longer going to be the main driver for achieved returns, and just turning up will no longer be good enough. We believe we will see increasingly divergent achieved returns between companies driven by relative performance (innovation led) and difference in cost of financing.”

Macquarie predicts a plain vanilla WAC of 2.3 per cent real (RPI based), down 38 per cent from the current price review period. It assumes a base RoRE of 4.2 per cent, in line with Ofwat’s published range of 3.8-4.5 per cent, but says that top performers could achieve double that: “Whilst the market focuses on the underlying baseline allowed returns, once totex, ODI and financing outperformance is added, total RoRE can be significantly higher.”

The consultation on Ofwat’s proposed PR19 methodology closed on August 30. The regulator received more than 60 responses which will be published alongside its final methodology in December 2017. The Consumer Council for Water raised concerns about the proposal for increased ODIs in its response - a measure that has been called for by water companies including Severn Trent.

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