Analyst Upgrade and Revised Outlook
Jefferies upgraded Pennon Group Plc to "buy" from "hold" after the company's shares fell about 20% following a £550 million rights issue that pushed the share price below the book value of equity per share.
The brokerage reduced its price target to 380 pence from 500 pence, which is 18% above the prior session close of 321.20 pence, reflecting dilution from the rights issue, lower net debt, higher growth in regulatory capital value (RCV) and a more cautious return forecast.
Jefferies cut its earnings‑per‑share forecast for the year to March 2027 by 9% to 25 pence (down from 27.40 pence) and expects a 28% decline in the FY 2028 earnings forecast. The dividend outlook was lowered to 18 pence for FY 2027 from 29.30 pence in FY 2026.
The firm models a 5.2% return on regulated equity over the current AMP8 regulatory period, broadly in line with the regulator’s base allowance. By comparison, South West Water delivered an average return of about 6% in the previous AMP7 period against a base allowance of 3.9%, and reported a 6.7% return (130 basis points outperformance) for fiscal 2025/26.
Pennon now trades at 0.8 times its equity RCV, a discount to its historical multiple and to peers, noting that UK water companies rarely trade below 1 times RCV over longer horizons.
Management’s practical turnaround plan aims to accelerate RCV growth to roughly 7% through AMP8, reduce regulated gearing to about 60%, and reinvest £600 million of efficiency savings. Specific measures include bringing leakage operations in‑house, expanding preventative maintenance, and targeting at least a 50% reduction in penalty exposure by 2030.
Net debt is projected at £4.40 billion, down from £5.0 billion before the rights issue.
Jefferies presented three price scenarios: a base case of 380 pence, an upside case of 460 pence (43% above the close) assuming a 6.8% return over AMP8, and a downside case of 270 pence (16% below) assuming a 3.2% return.
The analyst noted that uncertainty could ease over the next six to twelve months, citing the regulator’s final decision on reopened capital spending expected in December, the planned sale of Pennon Power, and further operational progress.
Stated risks include stronger than expected performance in the water business, regulatory scrutiny of storm overflows, rising bond yields and potential merger activity in the sector.