Credit Suisse downgrades Pennon to 'underperform'

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.