Jefferies has upgraded Pennon Group (LON: PNN), the South West Water owner, to Buy from Hold with a price target of 380p. The investment bank lowered the target from 500p, but says the shares have fallen far enough after last week’s rights issue.
Pennon traded at 322.8p at about 9.24am today, in delayed data, up 0.5% on yesterday’s close of 321.2p. The new target is about 18% above that level. The shares hit a 52-week low of 311.2p on Monday, the day they went ex-rights.
In a research note, Jefferies said the lack of updated Return on Regulated Equity targets, the equity return water companies aim for, had left uncertainty after the rights issue. That has seen the shares sell off by about 20%, which it says gives investors a margin of safety.
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The bank added that it sees management’s plan as credible, with scope for outperformance against low expectations.
The 20% refers to last Wednesday, when Pennon announced the raise and the shares closed at 361.2p, down 20.1% from 452p. The company is selling 7 new shares for every 15 held at 250p, fully underwritten, to fund about £1bn of extra investment in the water industry’s 2025 to 2030 regulatory period, and it rebased its dividend, a cut of about 30% per share on an underlying basis.
Brokers are split. RBC Capital Markets cut Pennon to Sector Perform from Outperform on Friday, with a 400p target, and analyst Alexander Wheeler pointed to a challenging outlook for returns and earnings. Deutsche Bank cut to Hold from Buy on Monday.
For shareholders weighing the offer, holders of CSN and WaterShare+ accounts must accept by 11am on the 22nd of October, and the final deadline is 11am on the 26th of October. Results are due by 8am on the 27th of October.
