United Utilities (LON:UU) and Severn Trent (LON:SVT) share prices have come under pressure recently as investors focus on the ongoing Thames Water woes. Severn Trent slipped to 2,470p on Thursday, 10% below its highest point in December.
United Utilities, on the other hand, retreated to 1,030p, 8.40% below the year-to-date high. Other UK utility companies have also retreated sharply recently.
Severn Trent vs United Utilities stocks
Thames Water crisis escalates
UK water utilities are paying a close attention to Thames Water, the embattled giant. Kemble, the parent company of Thames Water, risks moving into insolvency as soon as this week. Such a move will likely lead to the renationalisation of the company, three decades after it became privately owned.
Thames Water investors, who include giant pension funds, have refused to add more capital to the company, citing the actions of Ofwat, the water regulator in the country.
These investors want to boost water prices by 56% by 2030. They also want the regulator to ease the strict dividend rules and a reduction in pollution failures. Ofwat will deliver its draft on these issues by June and the final report in December.
According to Ofwat, water utilities companies should consider the performance of customers, the environment, and financial health before paying dividends.
This is happening at a time when Thames Water has a mountain of £18.3 billion of debt in a high-interest rate environment. It is also in a financial hole considering that it needs billions of pounds to carry out maintenance of its water infrastructure.
UK water utility companies like Severn Trent and United Utilities are therefore struggling because they face similar issues albeit less severe than Thames Water. They all struggle to increase their water prices and are seeing more need for maintenance because of the aging infrastructure.
United Utilities and Severn Trent performance
Thames Water’s woes stem from its long history of mismanagement and short-termism. Most of these issues happened when it was owned by Macquarie, the biggest Australian private equity company.
In its ownership, Macquarie boosted its total debt to over £18.7 billion as the management focused on generating strong returns.
The most recent results showed that United Utilities were under pressure. Its revenue for the six months to September 30th rose by 6.8% to £982 million. However, the rising cost of doing business had an impact on its profit, which crashed by 66% to £116 million. The company plans to spend £13.7 billion in expenditure between 2025 and 2030.
Meanwhile, Severn Trent said that its revenue rose to £1.2 billion in six months, up from £1.1 billion. Like United Utilies, its profits crashed from £261 million to £255 million. Its capital investments rose by 76.8%.
The two companies are also highly in debt. Severn Trent has a net debt of over £7.1 billion. United Utilities has over £8.5 billion in net debt.
Therefore, it is hard to make the case for investing in United Utilities and Severn Trent as the water sector comes under pressure. The challenge is that generating returns in this industry will be tough unless Ofwat increases water prices.