 Federal Water rehabilitation plans in the US and the Green Recovery scheme in the UK are new opportunities for growth  US stocks are best placed for growth. Pennon may provide the M&A blueprint for the UK  Downgrade UU to Reduce from Hold, Pennon to Hold from Buy; American Water and Essential, both Buy, offer more growth; Severn Trent remains Hold New opportunities for growth: Despite their ESG credentials, regulated UK and US utilities have performed less well than energy transition-focused stocks because of their status as bond proxies. The water proposals set out by the US government for accelerated investment and the UK’s Green Recovery proposals show policy-makers are waking up to the need to improve resilience in water and waste water provision.

Opportunities from Federal Water spending plans: The US administration has proposed a USD111bn budget, of which USD10bn is for monitoring and cleaning up toxic (per and polyfluoroalkyl substances) and investing in rural water systems, household wells, and septic units. USD56bn is proposed for modernising drinking water, wastewater, and storm water conveyance and treatment. The remaining USD45bn will be used to remove lead drinking water pipes. We raise our target prices for both US water companies we cover, which are well placed to benefit from the focus on asset rehabilitation and their expertise in removing water contaminants to address historical municipal underinvestment.

UK has insufficient investment – M&A could be the way to grow: In contrast, Ofwat’s PR19 price control focused on reducing customer bills rather than allowing RCV growth for the listed companies, except for Severn Trent. An announcement is due in May on whether it will allow the Green Recovery investment proposed by the companies or if it will be scaled back. We increase our risk-free rate in line with HSBC’s new UK bond yield assumption, which reduces our DCF valuation for UU (UU/ LN, 968p, TP 910p vs 960p, downgrade to Reduce from Hold). We assume Pennon and Severn Trent can deliver higher long-term growth from their more ambitious Green Recovery plans. Severn Trent (SVT LN, 2,447p, TP 2,570p vs 2,450p) remains Hold but we downgrade Pennon (PNN LN, 1,030p, TP 1,090p) to Hold from Buy after its strong recent performance.