By Peter McCready Water stocks still have many attractive defensive characteristics, but th...
By Peter McCready
Water stocks still have many attractive defensive characteristics, but the recent Welsh Water ruling by the regulator has disappointed the industry and weakened share prices.
At the end of January, Ofwat finally gave the go-ahead to Glas Cymru to buy Hyder's Welsh Water unit by assuming £1.8bn of the unit's debt. However, the regulator, Philip Fletcher has emphasised that this would not signal a relaxation of policies that have restricted companies from splitting up regulated water businesses.
The market believes that this splitting of assets and increased outsourcing will unlock much more value in individual companies. But Ofwat wants to make sure that customers will benefit from any such plans or finance restructuring deals.
AWG, Pennon, Kelda and Severn Trent Water are all interested in such deals, which would allow them to unload water assets and focus on areas with faster growth.
But Deutsche analyst Iain Turner said there is a weakness in stocks like these because without restructuring it will be difficult to see how they will unlock the value in their water arms..
What will happen next with these companies is anyone's guess, but water shares remain good value in uncertain times and a bear market. Last year they were among the best performers, and outperformed the FTSE 100 by 40% during the Asian crisis in 1998.
Water stocks are also yielding 7% to 8% on average and trading at a 13% to 14% discount to their regulatory asset value (RAV) the regulator's major method of valuing utility companies, which determines the returns shareholders and debt providers can hope for.
"Investors looking for income should buy water stocks, and they're also relatively cheap," commented Turner.