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On Tuesday, RBC Capital Markets adjusted their stance on Pennon Group Plc (LON:PNN:LN) (OTC: PEGRF), raising the stock’s rating from Sector Perform to Outperform, though reducing the price target from £6.75 to £6.00. The revision by RBC Capital comes after considering the company’s recent rights issue and updated management guidance, as well as new forecasts for the eighth Asset Management Plan (AMP8) based on company presentations and final determinations.
Analysts at RBC Capital highlighted the removal of what they referred to as a "balance sheet overhang" and a more appealing return target for Pennon Group than previously anticipated. The upgrade reflects a positive outlook on the company’s financial health and future performance.
The report also mentioned the valuation of Pennon Group’s stock, noting that it is trading broadly at the Regulatory Capital Value (RCV), which is seen as an attractive entry point for investors. In contrast, Severn Trent (LON:SVT:LN) is currently trading at approximately a 9% premium to its forecasted FY26 RCV.
RBC Capital’s analysis incorporated updated forecasts for the upcoming AMP8 period, which is crucial for companies in the water sector as it determines the framework for pricing and investments. The new estimates were based on both the companies’ presentations and the final determinations from the regulatory authorities.
The revised price target of £6.00 for Pennon Group reflects a more conservative outlook compared to the previous target, yet the upgrade to Outperform suggests confidence in the company’s potential to perform well in the market. The report provides a comparative perspective, including insights into the valuation of other companies in the sector, such as United Utilities (OTC:UUGRY) (UU:LN) and Severn Trent.
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