BNP Paribas has relaunched research coverage of three leading UK water utilities, designating United Utilities as its top pick while also providing fresh valuations and commentary on Pennon Group and Severn Trent. Joy Xu, the broker's analyst, applied ratings of "+" to United Utilities and Pennon and an "=" to Severn Trent.
The broker told clients it believes a "turning point" is approaching for the sector, as an improving regulatory backdrop and operational developments begin to outweigh the political scrutiny that has weighed on these stocks.
Regulatory and political context
BNP Paribas said the sector's underlying fundamentals have been strengthening and that these trends should re-emerge once the political noise subsides. The note highlights that UK water companies have been the focus of adverse publicity in recent years, a situation BNP Paribas says has been compounded by shifting political dynamics in the UK and has eroded investor confidence.
"The sector’s underlying fundamentals have been improving, and we expect these to resurface once the political noise subsides," BNP Paribas said.
The broker further commented that a major transformation is underway to put the industry on a better footing following the Cunliffe review and the government’s commitment to overhaul the sector. While BNP Paribas acknowledged that politics will likely remain a headline factor in the near term, the firm stated it does not view nationalisation as a plausible risk and expects volatility to decline in coming months.
Company-by-company valuations and rationale
For United Utilities BNP Paribas set a target price of 1,600 pence per share, which the broker said implies about 22% upside from a closing price of 1,314 pence. The note points to strengthening underlying growth at United Utilities, supported by a recent 2.5 billion capital expenditure upgrade that, according to BNP Paribas, underpins a 10% regulatory capital value (RCV) growth similar to Nat. Grid.
BNP Paribas also expects new regulatory mechanisms to lift earnings in later years and stated that its earnings-per-share forecasts for fiscal years 2027 to 2029 are 9% to 13% ahead of consensus estimates.
For Pennon, the broker assigned a target price of 560 pence, implying roughly 20% upside from a closing price of 466 pence. BNP Paribas described Pennon as poised for a strategic turnaround under new leadership following years of operational underperformance. The broker said Pennon trades at a discounted EV/RCV relative to peers and that operational improvements should lower fines and lift earnings, creating a rerating opportunity.
BNP Paribas put Severn Trent on a target price of 3,260 pence, implying about 10% upside from a closing price of 2,956 pence. The broker noted Severn Trent maintains a leading position in environmental performance, but indicated this strength is already priced into the stock as a sub-sector premium. BNP Paribas said it remains "on the sidelines" with Severn Trent until further catalysts appear.
Outlook and implications
Overall, BNP Paribas frames its coverage restart as based on improving sector fundamentals, regulatory reforms and company-specific actions that could restore investor confidence once the public and political debate calms. The broker expects near-term headline risk to persist but to be manageable and to give way to more stable trading as reforms take hold and new regulatory frameworks begin to benefit earnings.
Note: All ratings, target prices and quantitative references are those provided by BNP Paribas in the research note discussed above.