Pennon Group Shares Raised, Analyst Cites Undervalued UK Water Sector

Pennon Group shares (LON:PNN) are back trading under 500p, with the break above resistance proving short lived for bulls. A recent upgrade by JPMorgan analyst Pavan Mahbubani however has put a fresh take on the stock, with a price target that sits more than 20% up from here.

Mahbubani lifted Pennon's rating to Overweight from Neutral, setting a new price target of 600p, a significant increase from the previous 500p. This bullish outlook is underpinned by JPMorgan's view that UK water stock valuations are currently “undemanding” and poised for outperformance in the coming years.

The analyst believes that improved sentiment and regulatory clarity will drive sector outperformance, benefiting Pennon Group in particular.

The UK water sector is currently undergoing significant reforms, with regulatory changes aimed at stabilizing returns and addressing infrastructure challenges. While the sector is generally considered low risk, low return, Pennon's recent performance and the analyst upgrade suggest increasing investor confidence in the company's outlook.

However, not all news is positive. South West Water, a Pennon subsidiary, faces a £24 million payout due to wastewater management failures. This could temper enthusiasm, raising concerns about operational efficiency and regulatory scrutiny.

Adding complexity to the picture, CEO Susan Davy recently announced her retirement after a long tenure. While Davy cited the approval of investment plans by Ofwat as a natural juncture to step down, the departure of a long-standing CEO can introduce uncertainty.