Severn Trent Plc, the U.K.'s second- biggest water company, was raised to ``overweight'' from ``equal weight'' by Morgan Stanley because it's trading at a smaller premium to its regulated value than competitors.
The stock is trading 7 percent above its March 2009 regulatory asset base, a formula used to set market value according to regulatory agreements. That compares with an average of 14 percent for other water companies, Morgan Stanley said.
``It is now the cheapest stock in sector,'' analysts including Bobby Chada said today in a note to investors.
Severn Trent rose 39 pence, or 2.8 percent, to close at 1,453 pence in London, giving the Birmingham, England-based company a market value of 3.41 billion pounds ($6.81 billion). The stock has declined 4.8 percent this year.
The utility fell 3.7 percent yesterday after saying full- year earnings were ``consistent with its expectations.'' The company is awaiting the outcome of charges from the U.K.'s Serious Fraud Office for reporting false leakage data. Water regulator Ofwat is also investigating Severn Trent's customer service.
``Concerns around size of fines from the Serious Fraud Office and Ofwat are overdone,'' the Morgan Stanley analysts said, setting a price target of 1,570 pence.
The bank downgraded Northumbrian Water Group Plc to ``equal weight'' from ``overweight'' and set a target price of 350 pence. Northumbrian fell 2 pence, or 0.6 percent, to close at 338.75 pence in London. The shares have lost 0.7 percent this year.
The U.K.'s biggest publicly traded water company is United Utilities Plc.