By John Ficenec, 22 February 2012
The Department for Environment, Food and Rural Affairs has raised the spectre that this summer might be a re-run of 1976, with stand-pipes in the streets, lawns baked dry and hosepipe bans. But will investors' returns dry up too? Our analysis suggests not - and some companies could even benefit.
With so many customers now on water meters rather than water rates, the quoted water companies - Pennon, Severn Trent and United Utilities - would be the obvious losers from any restrictions on water usage.
But the good news for investors is that the drought conditions are focused in the south-east, a region mainly serviced by foreign-owned players such as Thames Water and Wessex Water. Scotland and much of northern England have experienced average or above-average rainfall for the past two years. That means
Severn Trent could be at risk as it serves some of the areas Defra has listed as a high drought risk. However, Mark Freshney, utilities analyst at Credit Suisse, believes the drought is unlikely to have an impact on the company's shares. Severn Trent said recently that it does not predict any usage restrictions this year, having taken measures to fill reservoirs, while 70 per cent of households in its region are still not metered.
Dry ground is bad for livestock farmers. Grazing may not be sufficient to support animal stocks across Britain's farming industry, forcing farmers to buy in feedstuffs. This could boost demand for the products of animal feed suppliers such as
IC VIEW:
The listed water utilities are unlikely to suffer any adverse affects from the drought and the sector still has attractive defensive characteristics, so we retain our buy recommendation on United Utilities. Likely beneficiaries of the drought are more tangential, but we like feedstock supplier Wynnstay; recent results were solid and we retain our buy recommendation.
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