RBC downgrades Pennon to sector perform, cuts target to 400p

RBC Capital Markets has downgraded Pennon Group (LSE: PNN), the owner of South West Water, to “sector perform” from “outperform”. The broker also cut its price target to 400p from 575p.

Pennon shares were trading at 367p on Friday, the last session before the weekend. That is below the new 400p target and well below the old 575p one.

RBC’s note follows Pennon’s strategic plan update. That update included a £550m equity raise, meaning new shares sold to raise cash, which strengthened the company’s balance sheet.

A sturdier balance sheet was not enough to keep RBC positive. The broker said the improvement was insufficient to offset “a challenging outlook across AMP8 for returns/earnings”.

AMP8 is the next five-year regulatory cycle for water companies in England and Wales. It sets the framework for investment, returns and customer bills.

RBC also pointed to a more limited dividend yield spread after Pennon’s dividend cut. In plain terms, the yield advantage over alternative investments is smaller than before.

“Sector perform” means RBC expects the stock to match the wider sector rather than beat it. That is a step down from the “outperform” rating the broker held before the note.

With markets shut today, the next read on how investors take the downgrade comes when trading resumes.