Deutsche Bank downgrades Pennon to 'sell'
By Michele Maatouk
Date: Tuesday 07 Jan 2025
(Sharecast News) - Deutsche Bank downgraded Pennon on Tuesday to 'sell' from 'hold' and cut the price target to 530p from 600p as it took a look at water stocks following the publication of Ofwat's final determinations in December.
DB said the downgrade reflects the likelihood of a large equity raise, potential for a large dividend cut and lower shareholder return potential than peers.
It also said the stock may look richer than peers on 2025/26 estimated price-to-earnings, but it estimates lower equity return and RAB growth.
Deutsche reiterated its 'buy' rating on United Utilities, which has a 1,200p price target and kept Severn Trent at 'hold' with a 2,800 target.
It said the balance sheets of UU and SVT look "broadly ok" although Pennon is more leveraged.
"If Pennon doesn't raise equity we estimate adjusted net debt/RAB could rise to around 80% by 2030," it said. DB said it now models new equity of around £500m, up from £300m, which is about 30% of market cap.
"We also model a pre-emptive raise of £500m by Severn Trent in 2028/29, ahead of the next regulatory period."
It said the dividend per share looks sustainable for UU and SVT but models a 35% cut for Pennon.
At 1115 GMT, Pennon shares were down 2.7% a 563p.
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