Pennon Group, owner of South West Water and one of the UK's listed water utilities, has been downgraded by RBC Capital Markets from 'outperform' to 'sector perform', with the bank's price target cut sharply from 575p to 400p.
The downgrade follows Pennon's strategic plan update, which included a £550 million equity raise that has strengthened its balance sheet.
Despite the improved financial position, RBC sees a difficult period ahead under AMP8, the next five-year regulatory cycle for England and Wales water companies, which sets the framework for investment, returns and customer bills.
The bank cited a challenging outlook for returns and earnings through the regulatory period, along with a more limited dividend yield spread following Pennon's announced dividend cut.
RBC said Pennon's improved balance sheet was insufficient to offset what it described as "a challenging outlook across AMP8 for returns/earnings".
Pennon shares were trading at 367p on Friday, below RBC's revised 400p target and sharply adrift of the 575p target the bank previously carried.
