On the face of it the FTSE All Share Water index has easily outperformed the FTSE 100 index in the p...
On the face of it the FTSE All Share Water index has easily outperformed the FTSE 100 index in the past year by only losing 7.5% of its value compared to more than 22% shed by the 100 biggest UK companies.
However, the water sector is under threat from an increasing propensity among customers to delay or outright refuse to pay for services delivered, according to a water industry think-tank session into debt problems held yesterday in the City.
The reason water stocks have done so well is that they are considered solid in times of economic difficulty because earnings stay stable relative to those of companies in cyclical industries.
But industry regulator Ofwat says that 19% of domestic customers are now paying their bills late or not at all, and that this rate is growing.
The industry fears that figure will keep growing as long as water companies are not allowed to cut off supplies to non-payers.
That 19% late or non-payment rate means reduced income from some 4.6 million households out of the 24.7 million nationwide, according to Halifax figures.
Given a conservative average annual water bill of, say, £150, that means sales of about £700m are threatened.
On the current sector index average price/sales ratio of 1.5, that equates to a share price discount of around £1bn that needs to be factored in - although that includes all water companies and not just those in the index.
The exact figure will vary due to price caps imposed on individual water companies by Ofwat, but however the sums are cut companies are facing significant losses.
The FTSE All Share Water index members collectively have a market capitalisation value of nearly £10bn, and historical annual earnings of more than £600m based on the current index P/E ratio.
Partner Insight: For Blackfinch, the arrival of its IHT portfolio services was a 'natural evolution' in the group's offering and points to an established track record of returning cash to investors.
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