On Friday, UBS analyst maintained a Sell rating on Severn Trent Plc. (LON:SVT:LN) (OTC: SVTRF), with a price target set at GBP23.90. According to InvestingPro data, the company currently trades at a P/E ratio of 32.7, reflecting a premium valuation that aligns with the analyst's cautious stance. Freshney acknowledged the company's consistent achievements, which include being fast-tracked in the 2019 price control, receiving a Green Recovery Spend award in 2021, and currently nearing a review it sought for the 2024 price control period spanning 2026-2030.
Despite these successes, the UBS analyst believes that Severn Trent's stock price already reflects these positives, as it trades at around a 15% premium to its March 2026 Regulatory Asset Base (RAB).
The analyst pointed out that the anticipated benefits are included in the current stock price. InvestingPro analysis supports this view, indicating the stock is currently overvalued relative to its Fair Value. While the company boasts an impressive 33-year track record of maintaining dividend payments, investors should note its significant debt burden, with a debt-to-equity ratio of 4.85.
Furthermore, UBS has raised its earnings per share (EPS) estimates for Severn Trent for the years 2026 to 2028 by 49-20%. This revision is based on the expected benefits from a roughly 30 basis points higher Regulated Capital Value (RCV) run-off rates, Outcome Delivery Incentives (ODI) recovery, and RAB growth. However, the analyst noted that the increase in EPS forecasts is primarily due to the company's asset base and does not necessarily indicate an increase in value.
Severn Trent's recent request for a review in the upcoming price control period demonstrates the company's proactive approach to regulatory management.
The analyst's comments suggest that while Severn Trent's operational performance is strong, with revenue growth of 5.42% in the last twelve months, the current share price may already account for the anticipated regulatory advantages.
As a result, investors may have already priced in the company's recent achievements and expected regulatory outcomes. For deeper insights into Severn Trent's valuation and 8 additional exclusive ProTips, visit InvestingPro.
In other recent news, Severn Trent, a UK-based water utility company, has experienced changes in its stock rating. Global investment banking firm, Jefferies, downgraded the company's shares from Buy to Hold, adjusting the price target to GBP2.83 from GBP2.88, based on the company's current valuation.
This valuation is supported by Severn Trent's strong performance on Outcome Delivery Incentives (ODIs), mechanisms in the UK water industry that reward or penalize companies for their performance. The company's decision to raise £1 billion, equivalent to 20% of its market capitalization, in equity last year has provided clear insights into Severn Trent's financial situation and its dividend policy, according to Jefferies.
On the other hand, Citi, another global banking firm, revised its rating on Severn Trent, shifting from a "Sell" to a "Neutral" stance. The firm also increased the water company's price target to GBP24.67, up from GBP22.83. The adjustment comes as Citi acknowledges Severn Trent's improved financial health and consistent performance in ODIs. Despite the upgrade, Citi pointed out that Severn Trent's shares are trading at a significant premium compared to the regulatory asset base (RAB) when measured against its industry peers.
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