Investec downgrades Pennon Group on strong share performance

Investec has downgraded Pennon Group from ‘buy’ to ‘hold’ after the company’s strong share performance.

The FTSE 250 water company posted a rise in first half profit and earnings on Friday despite a small drop in revenue, as all businesses across the group performed well.

For the half year to the end of September, pre-tax profit rose 6.8% from the same period last year to £106.8m, while earnings before interest, taxes, depreciation and amortisation grew 15.9% to £231.7m.

Revenue nudged a bit lower, however, down to £689.1m from £692.3m, with sales at waste unit Viridor falling due to lower construction revenue from service concession arrangements as facilities come on-stream.

Investec said on Monday that the the stock has performed strongly since September, driven by investors’ reassessment of risks concerning Viridor and the potential for overcapacity in residual waste markets.

It noted that the results demonstrate strengths in both the regulated and non-regulated businesses.

“A low cost of capital is a key competitive strength, and perhaps legitimises Pennon’s group structure,” it said.

“But it remains a major source of regulated returns and is exposed to regulatory risk in the run-up to PR19, where risk-sharing mechanisms on financing will be considered.”

Investec also revised its price target up from 800p to 840p.

Shares in Pennon Group dropped in early trading, down 19p (2.15%) to 864p at 1023 GMT.