JP Morgan upgrades Pennon and Severn Trent after they reach unusually low levels

Analysts at JP Morgan upgraded their recommendations for Pennon and Severn Trent, arguing that concerns about regulatory risk, rising government bond yields and possible nationalisation by a Labour government had pushed the shares to "unusually low" levels.

That trifecta of risks was on top of the "more traditional" decarbonisation, affordability and security of supply balancing act, they said.

"We take this opportunity to highlight stocks in our coverage universe that are oversold, trading at a material discount to 'worst case' nationalisation scenario projections," they added.

Looking out to 2021/22, Severn Trent (target price: 2,250p), United Utilities (target price: 1,000p) and Pennon (target price: 830p) were changing hands at discounts of 1%, 5% and 11% versus their regulated capital values, respectively.

Yet in their opinion that made little sense in the context of Labour's nationalisation threat.

Hence, they upgraded their recommendation for Pennon and Severn Trent from 'neutral' to 'overweight' and said they were at 'overweight' on United Utilities, having had no coverage on it beforehand.

At a forward price-to-earnings multiple of 12.5 and offering a dividend yield of 6.6%, their preferred stock in the UK water space was Pennon, while with United Utilities at a discount to its RCV, they preferred it over Severn Trent.