Bryan Garnier downgrades Pennon on valuation

Bryan Garnier downgraded its rating on Pennon Group to ‘sell’ from ‘neutral’ following a fairly strong relative performance over the past six months and the fact it is now trading just 9% below its all-time high.

“We appreciate the group’s strategy, especially in the waste business, but see potential uncertainty on UK inflation and power prices as clearly negative for the investment case, especially at current multiples,” it said.

Bryan Garnier noted that Pennon, like other regulated US and European water stocks, has massively outperformed all major indices since the 2008 financial crisis, as investors look for visibility on earnings and above-average real yields.

It argued that at the current price, shares are not cheap.

“While we understand the reasons for this outperformance, we struggle to see how investors can still be attracted to a stock trading at 13.9x 2016/17e EBITDA and 22.5x earnings, versus historical multiples of respectively 11x and at 14.3x, and most importantly, versus the peer group at 10x and 19.x.”

BG added that at 833p the stock is only 9% below its highest ever level while the Stoxx 600 utilities index is trading 50% below.

Bryan Garnier upped its 2015-2019 earnings per share estimate by an average 4.5% due to a slightly better operating performance by Viridor and lower financial charges, and lifted the price target to 825p from 800p.

At 1037 GMT, Pennon shares were 1.4% lower at 821p.