Credit Suisse downgrades Pennon to 'underperform'

Credit Suisse downgraded Pennon to ‘underperform’ from ‘neutral’ and cut the price target to 730p from 770p.

The bank pointed out that power and recyclate prices are down around 15-20% since October, but Pennon has outperformed UK utilities by around 9%.

CS cut its full year March 2017 earnings per share forecasts by 4-5%, saying commodity price exposure was underestimated.

“We see around 14% of group revenue directly affected by power and recyclate prices. Recyclate prices have fallen sharply and UK power prices are down around 25% in the past year. Every 15% decrease in recyclate price reduces EPS c9%, on our numbers,” said the bank.

It added that the stock has outperformed and earnings expectations look too optimistic.

In addition, the bank said full year results from Shanks show long-term waste contracts with UK local authorities are not without risk and commodity exposure.

The bank said Pennon’s valuation was near an all-time peak, trading at a premium of around 40% to the March 2017 regulatory asset base.

Credit Suisse said it now values the core waste business at zero, as it sees it cash-flow negative with negligible EBITDA from 2018.

At 1500 GMT, Pennon shares were down 1.7% to 815p.