RBC upgrades Pennon to 'outperform'
By Iain Gilbert
Date: Friday 06 Sep 2019
(Sharecast News) - Analysts at RBC Capital Markets upgraded British utility company Pennon from 'sector perform' to 'outperform' on Friday, on the back of expectations for "strong growth" in its recycling and energy recovery and waste management unit, Viridor.
RBC predicted solid growth in Viridor through opportunities in plastics recycling and believed that growth in the unit would support a "sector-leading dividend" and mitigate lower returns in regulated water.
Pennon's £65.0m investment in plastics recycling facilities was announced with an "attractive" 15% internal rate of return hurdle rate and a forecast contribution of around £20.0m to underlying earnings per year and with another two opportunities in the area, RBC felt Viridor was showing "a strong capability to leverage existing experience and gain significant cost efficiencies".
RBC said this should contribute to "a strong earnings profile" for the business going forward, helping support Pennon's "sector-leading dividend".
Furthermore, the Canadian broker now expected South West Water to continue to be one of the "top performers" on return on retained earnings, with a nominal RoRE of roughly 7.4% versus its previous assumption of 8.1%.
"Despite a strong recovery in PNN over the last two weeks, we believe there is still further upside given the positive outlook for Viridor," said RBC, which also raised its price target on the group's shares from 825.0p to 875.0p.
"Our updated estimates account for a lower regulated return, which reduces our FY21E estimates, however, this is offset by additional revenues from plastic recycling in 2022."
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