Investing.com -- Jefferies upgraded British water and sewerage company Pennon Group Plc to "buy" from "hold" on Wednesday, saying a roughly 20% share price drop after last week's rights issue left the stock below the book value of its equity per share.
The analysts cut their price target to 380 pence from 500 pence, which is 18% above the prior session's close of 321.20 pence.
They said the lower target reflects the dilution from the £550 million rights issue, lower net debt, higher growth in regulatory capital value (RCV) and a more cautious forecast for returns.
Pennon shares fell about 20% on the day because the company gave no updated targets for return on regulated equity after the share sale, Jefferies said.
The analysts called management's reluctance to set near-term targets understandable, as it is Pennon's second equity raise in two years and a new chief executive is in place.
Jefferies cut its earnings per share forecast for the year to March 2027 by 9% to 25 pence from 27.40 pence, and its forecast for fiscal 2028 by 28%. It forecasts a dividend of 18 pence for fiscal 2027, down from 29.30 pence in fiscal 2026.
Jefferies models a 5.2% return on regulated equity over AMP8, the regulatory period now under way, which it said is broadly in line with the base allowance set by the regulator.
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It said South West Water averaged about 6% over the previous period, AMP7, against a base allowed return of 3.9%. For fiscal 2025/26, it reported a return of 6.7%, or 130 basis points of outperformance.
Pennon trades at 0.8 times equity RCV, a discount to its history and peers, and UK water companies rarely trade below 1 times RCV over longer periods, Jefferies said.
The analysts described management's turnaround plan as "practical rather than transformational." It aims to speed RCV growth to about 7% through AMP8, cut regulated gearing toward about 60% and reinvest £600 million of efficiencies.
Measures include bringing leakage operations in-house and more preventative maintenance. Management targets at least a 50% cut in penalty exposure by 2030.
Net debt is forecast at £4.40 billion, down from £5 billion before the rights issue.
Jefferies set a base case of 380 pence, an upside case of 460 pence (43% above the close) and a downside case of 270 pence (16% below). The upside case assumes a 6.8% return over AMP8 and the downside case 3.2%.
Jefferies said uncertainty could ease over the next six to 12 months. It pointed to the regulator's final determination on reopened capital spending in December, the planned sale of Pennon Power and further signs of operational progress.
Its stated risks include outperformance in the water business, regulatory scrutiny of storm overflows, bond yields and merger activity in the sector.
Original Article
Jefferies upgrades Pennon to "buy," says low expectations give room to beat
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