Jefferies has upgraded Pennon, the South West Water owner, to 'buy' from hold, setting a price target of 380p after shares fell around 20% following last week's £550 million rights issue.
The bank argues the sell-off has pushed the stock below book equity regulated capital value per share, creating a margin of safety.
Pennon's failure to provide updated return on regulated equity targets alongside the rights issue created uncertainty that the market has filled with caution, Jefferies says.
The bank models a 5.2% real return on regulated equity over the current AMP8 regulatory period, broadly in line with the base regulatory allowance.
South West Water delivered an average return of around 6% over the previous regulatory period, against a base allowed return of 3.9%, giving Jefferies confidence in the operational outlook.
The turnaround plan, which includes insourcing leakage operations, greater preventative maintenance and tighter performance management, is described as practical rather than transformational.
Pennon is targeting regulated capital value growth of at least 40% through AMP8, against a previous target of 34%, while reducing regulated gearing towards 60%.
At 0.8 times equity regulated capital value, Pennon trades at a material discount to both its own history and sector peers, Jefferies notes.
The bank sees several near-term catalysts to reduce uncertainty, including the Ofwat reopener final determination in December, the planned disposal of Pennon Power and further evidence of operational progress.
Jefferies cut its earnings per share estimates by 9% for 2027 and 28% for 2028, reflecting the dilutive impact of the rights issue, lower net debt and a more conservative returns profile.
