Is industry a busted flush?

As Thames Water scandal weighs down shares in its listed rivals . . .

THE shock ripples continue to flow from the news that Thames Water, the privately-owned supplier to London and the South East, has been declared ‘uninvestible’ by its shareholders.

Advisers are working to restructure the debt-laden business, but it may yet have to be temporarily renationalised. Yesterday its parent company defaulted on interest payments on a £400m bond.

The reverberations have affected shares in Pennon, Severn Trent and United Utilities, the industry’s three quoted companies which, like Thames Water, have an appalling record on both leaks and pollution.

But the crisis at Thames Water seems to be turning a spotlight on their strengths. Not only are their debts much lower, they are also felt to be more resilient, thanks to their quoted status. Pennon is a member of the FTSE 250, and Severn Trent and United Utilities are FTSE 100 constituents.

The publicity surrounding Thames Water is also having a wider effect, at home and worldwide, encouraging some investors to seek out companies that are endeavouring to improve supply and environmental standards.

Caroline Langley, deputy manager of the Quilter Cheviot Climate Assets fund says: ‘Population growth, urbanisation, and climate change are intensifying the strain on systems worldwide.’

These trends lie behind the forecasts from the US analytics group Precedence that the global water sector, worth an estimated £261bn in 2023, could grow to £457bn by 2032.

KEY beneficiaries of this expansion, it is argued, will be the quoted players in the UK and elsewhere since the transparency required by a listed status obliges a water company to be ‘ more community and environmentallyminded’. Or so John Moore of wealth manager RBC Brewin Dolphin, contends.

The arguments in favour of listed water companies come amid calls for all water companies to be returned to public ownership.

But it is hard to see how any government would contemplate such an outcome, given the funds required to remedy decades of underinvestment in infrastructure. For example, the cost of eliminating combined sewer overflows ranges from £350bn to as much as £600bn.

These bills provide another argument that water companies require the access to long-term capital that only a stock market listing can provide.

Until the outlook becomes clearer, it seems worth hanging on to Pennon, Severn Trent and United Utilities.

This uncertainty means more investors will be looking outside the UK, however. Dan Boardman-Weston of BRI Wealth Management says: ‘The world will have an increasing problem with water as a result of population growth, urbanisation, increased affluence and poor infrastructure. We invest in JO Hambro’s Regnan Sustainable Water and Waste fund which backs companies providing solutions.’

Among this fund’s holdings are US groups Core & Main and Xylem, the global water treatment group. Its shares have risen by 46pc over the past six months to $128, but analysts at BNP Paribas are targeting a further increase to $150.

Holdings at the Quilter Cheviot Climate Asset fund include the appropriately-named Waters, another US multinational which specialises in water testing.

The Thames Water scandal may make you wish to stay away from water. But it may be wise to be positioned for the affair’s repercussions. Tougher environmental impact regulations may result, which is causing me to contemplate dipping a toe (as it were) into the shares of Halma, the FTSE 100 company. It has six businesses, all dedicated to the conservation and improvement of water.

Halma’s shares stand at 2270p. But brokers UBS have recently tipped them as a buy with a target of 2700p which would certainly justify my, er, splashing out.