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On Friday, UBS analyst revised the price target for Pennon Group Plc (LON:PNN:LN) (OTC: PEGRF) to GBP 8.50, down from the previous GBP 9.15, while retaining a Buy rating on the stock. Freshney's analysis draws on the recent PR24 price control outcome, which he perceives as favorable for Pennon due to the anticipated asset base growth. The allowed return of 4.0% CPIH real wholesale matched UBS's projections.
The adjustment in the price target comes after UBS aligned its financial model with the final determination. The firm has reduced its EBIT forecast by a cumulative £184 million for the fiscal years ending in March 2026 to 2030, primarily due to a lower Regulatory Capital Value (RCV) run-off, accounting for £110 million of the reduction. Additionally, UBS's earnings per share (EPS) estimates for Pennon have been lowered by 9% for the fiscal year ending in March 2026 and by 22% for the following year.
Despite these downward revisions, Freshney notes that the changes in EPS forecasts do not affect the firm's valuation of Pennon's stock. However, UBS now anticipates a dividend cut of 35%, up from the previously expected 25%, to support the significant asset base growth.
The new price target of 850 pence reflects an increase in the real risk-free rate by 25 basis points in the firm's Weighted Average Cost of Capital (WACC) calculation. Freshney's commentary underscores the strategic adjustments Pennon may make to fund its growth while aligning with the regulatory framework.
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