On Tuesday, Citi revised its rating on Severn Trent Plc (LON:SVT:LN) (OTC: SVTRF), shifting from a "Sell" to a "Neutral" stance. The firm also increased the water company's price target to GBP24.67, up from the previous GBP22.83.
The adjustment comes as the analyst acknowledges Severn Trent's improved financial health and consistent performance in operational delivery incentives (ODI), which are key metrics for regulatory compliance and customer service in the UK water sector.
The analyst from Citi highlighted that Severn Trent has "fixed" its balance sheet, a move that strengthens the company's financial stability. This development, along with the company's strong track record in meeting ODI benchmarks, has reduced the perceived investment risk, making a bearish outlook less justifiable. These factors have contributed to the decision to upgrade the stock rating.
Despite the upgrade, the analyst 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. This premium is a factor that tempers the firm's enthusiasm for adopting a more bullish position on the stock.
Citi's analysis also notes the broader challenges that remain within the water sector, including political and operational hurdles. These challenges could potentially impact Severn Trent and its peers, suggesting a cautious approach to the sector is still warranted.
In summary, Citi's new price target of GBP24.67 reflects a modestly more optimistic outlook for Severn Trent, recognizing the company's financial improvements and consistent regulatory performance. However, the market premium and sector-wide issues prevent a fully bullish perspective, leading to the neutral rating.
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