Deutsche Bank has downgraded Pennon Group, the water and wastewater utility, from 'buy' to 'hold' and slashed its price target from 550p to 380p, citing a lack of medium-term guidance, stagnant earnings forecasts and equity returns that fall short of the cost of capital.
Analyst James Brand said the near-term investment case has become increasingly difficult to make despite his continued belief that the company's turnaround under new management has a high chance of success.
The bank now forecasts earnings per share of 26p in 2026/27, barely moving to 25p by 2029/30, a stark contrast to the 9% annual EPS growth it had previously modelled and a trajectory that compares poorly with peers across the utilities sector.
Brand also flagged that equity returns are expected to average around 7% in nominal terms through the remainder of the current regulatory period, below Pennon's estimated cost of equity of 9.7%.
The absence of clear earnings or return guidance from management was identified as a key stumbling block for investors trying to assess when and whether the recovery translates into value.
Pennon, which owns South West Water and has faced intense scrutiny over water quality and financial management in recent years, brought in new leadership to stabilise the business and position it for the next regulatory cycle running from 2030 to 2035.
Brand acknowledged that successful execution of the turnaround should leave the company better placed heading into that period, but said the lack of near-term visibility makes it hard to justify holding the stock at a premium to its current price.
Pennon shares closed at 357p on Friday, just below the revised 380p target, leaving limited implied upside at the new rating.
