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On Monday, JPMorgan downgraded Pennon (LON:PNN) Group Plc. shares (PNN:LN) (OTC: PEGRF) from Overweight to Neutral, adjusting the price target to GBP4.75 from the previous GBP6.10. The revision reflects a reassessment of the company’s balance sheet and future revenue growth potential.
The downgrade comes as JPMorgan analysts re-evaluate Pennon’s financial position and performance forecasts. According to the firm, Pennon’s balance sheet has become less risky, and the firm’s projections include a 34% nominal Regulatory Capital Value (RCV) growth over the Asset Management Plan 8 (AMP8) period. This growth is underpinned by an expected 100 basis points Return on Regulated Equity (RoRE) outperformance at the notional company level, with a 55% gearing assumption, primarily driven by financing outperformance.
Pennon’s valuation, as per JPMorgan’s analysis, is based on a 2% real RCV growth assumption from 2030 to 2040 and no real RCV growth beyond that time frame. These estimates align with the growth rates assumed for other water companies within JPMorgan’s coverage area.
In addition, the analysts have incorporated a £14 million fine into their forecast for the fiscal year 2027. This fine relates to the ongoing investigation by Ofwat, the water services regulation authority, into the wastewater sector. The anticipated penalty, which is equivalent to 5% of Pennon’s fiscal year 2024 wastewater revenues, mirrors the level of penalty previously applied to Northumbrian Water in August, which is not publicly listed.
Pennon Group Plc. is a British water utility and waste management company headquartered in Exeter, England. The company’s shares are traded on the London Stock Exchange (LON:LSEG) and over-the-counter markets. The reevaluation by JPMorgan reflects the latest available financial data and industry regulatory developments impacting Pennon’s business operations.
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