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January 7, 2024 6:49 am
Our new research publication, entitled “Low Tide,” asks what investors in Thames Water would have learned about the risk of their investment and its likely market value had they compared its characteristics to market and peer group data.
Presented as a large utility epitomising the “stable and predictable” cash flows of the infrastructure asset class, the investment in Thames Water was impaired by almost 30% in December, an abrupt and unexpected loss of approximately GBP1.5bn for investors including UK, Japanese and Canadian pension plans. Only nine months earlier, in March 2022, some investors were still increasing the valuations, but for such a large water utility to lose so much value so fast, the investment must in fact have been mispriced for several years.
The research shows that a straightforward comparative analysis reveals the emergence of a high-risk, low-return profile that should have raised at least three red flags:
• Red flag #1: The company should have been expected to take on too much risk as it faced ‘twisted’ incentives in the shape of an extremely low weighted average cost of capital imposed by the regulator.
• Reg flag #2: The company created not only a structure to extract a lot of cash but also a huge debt pile – it should have been clear from 2016 onwards that there will be no payout for many years.
• Red flag #3: Thames Water’s exposure to key risk factors was always high compared to its peers and increased over time: this implied a much higher discount rate and lower value than what was reported until the company’s value was brutally reduced by 30% last year.
Read the full Press Release here.
