Market report: Demand drought for water firms after gloom in City

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National Grid’s gas distribution business is attracting the attention of foreign suitors, but the City was running the rule today over other possible overseas takeovers for strategic UK assets. 

Analysts at RBC speculated that bids for Severn Trent and United Utilities, water companies that investors have flooded to amid the market volatility caused by Brexit, could be a possibility.

However, the investment bank suggested that the chance of takeover approaches would be the only reason to invest in the FTSE 100 duo as it cut its ratings on both to Underperform.

“We believe M&A [mergers and acquisitions] potential is the only true relative attraction for investors buying (or holding on to) Severn Trent and United Utilities at current trading levels,” said RBC’s Maurice Choy.

The analyst said offers would need to be 40% higher than the regulatory asset base (RAB), the underlying value defined by regulator Ofwat, for any decent returns.

The Chinese are among the bidders for a majority stake in National Grid’s gas business, worth £11 billion, and SSE is looking for buyers for part of its 50% stake in regional gas distribution network SGN.

Water companies are seen as defensive stocks given that households keep taps flowing regardless of macroeconomic conditions.

Shares in Severn Trent, up 12% since the Brexit vote, retreated 47p to 2449p on RBC’s downgrade, while United Utilities fell 25.5p to 969p.

The equity rally ran out of steam as the FTSE 100 dipped 17.40 points to 7056.94, having finished just short of its all-time high yesterday, with chatter that the European Central Bank has discussed tapering its bond-buying keeping buyers on the sidelines.

Royal Dutch Shell ticked up 20.5p to 2118.00 as Brent crude rose 78 cents, or 1.5%, to $51.65 a barrel, while a rally from supermarket shares, triggered by signs of recovery at Tesco, also lifted the blue-chip index.

Centamin rose 1.3p to 146.5p, partly thanks to a slight gold price recovery, but also after the Egyptian gold miner said its annual production would be at the top end of guidance.

Insurer Hastings slipped 8.85p to 219.65p as a group of investors, led by co-founder Neil Utley, offloaded shares worth £100 million.

Clinigen’s chief strategy officer Simon Estcourt took advantage of the AIM-listed drug firm’s all-time stock market high by selling another £1.2 million of shares. Investors copied his strategy, which follows last week’s announcement that chief executive Peter George is stepping down, and sent the shares down 10p to 770.5p.

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October 5, 2016 |
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