Pennon boosted by Credit Suisse upgrade

Pennon bucked the downtrend on Wednesday as Credit Suisse lifted its rating on the stock to ‘neutral’ from ‘underperform’ and upped the price target to 800p from 790p.

“We upgrade to neutral, as we see a lack of immediate downside risks with near-term upside to consensus earnings per share.”

CS pointed out that Pennon has been the worst-performing UK utility year to date, as it noted recyclate prices have risen sharply and Pennon should benefit from sterling weakness.

Pennon has underperformed the MSCI European Utilities index by around 14%, UK regulated peers by around 11% and the FTSE 100 by approximately 15%.

“We see this driven by an increased awareness and focus on risks in the waste business. We see significant medium-term pricing risk in energy from waste, but this will take some time to materialise.

“Following recent underperformance and recyclate price improvement we now see upside risks to an underweight position on a 12-month view.”

Credit Suisse said it is not clear that Pennon will capture all of the upside associated with the recent rally in paper prices, given its risk sharing mechanisms in place with an increasing number of customer contracts.

However, given the currently low margins a small change in pricing can have a significant impact on profitability.

At 0945 GMT, Pennon shares were up 2% to 825p.