Waste Disposal Units Set to Clean Up for Water Utilities; Market Report

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Byline: TOM NICHOLLS

REGULATOR Ofwat is expected to sanction price rises for cashstrapped water utilities next month, but one of the City's biggest players thinks it is nonwater divisions that provide most scope for upgrades.

JP Morgan, reiterating its neutral stance on UK water relative to other utilities, picks out AWG as its key sector overweight, which it says will be a "clear winner" in the restructuring of non-regulated businesses, such as waste disposal.

With prospects for dividend rises, the broker also likes the look of Pennon and Severn Trent, but it has retained its underweight recommendation on Kelda and United Utilities.

Market attention on water is set to intensify in the next few weeks.

First-half results are due towards the end of November and in early December. They are likely to be overshadowed by Ofwat's decision on water tariffs, out on 2 December, although its final recommendations are thought unlikely to differ greatly from August's draft report. Tariff increases flagged in the draft have seen UK water stocks rise by 12% since the summer, outpacing a rise in the FTSE 250 of 9%.

JP Morgan also raises the prospect that takeover speculation could prop up sector valuations. The broker reckons the smaller, wateronly companies are increasinglylikely to become targets, while the bigger water-and-sewerage companies are unlikely to catch the eye of venture capitalists.

There is no shortage of takeover action elsewhere. The scene is set for a juicy battle between AIMlisted investment firm Melrose and Novar, which makes heating, ventilation and technology equipment for new buildings, as well as aluminium parts and owning a cheque-printing business. …

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