Has the tide finally turned for Pennon?
Last updated: 16:00 04 Jun 2025 BST, First published: 15:50 04 Jun 2025 BST
UBS believes the tide may finally be turning for Pennon Group PLC (LSE:PNN, OTC:PEGRY).
The water utility’s full-year results were largely in line with expectations, and analysts say the worst of its inflation-driven cost pressures and operational underperformance may now be behind it.
In a note out this week, UBS reiterated its 'buy' rating and 605p price target on the shares, which were flat at 485.2p on Wednesday, offering nearly 25% upside.
While the South West Water owner's underlying operating profit came in just 1% below consensus, the broker sees signs of stabilisation.
Adjusted earnings per share matched forecasts, and while debt ticked up slightly due to working capital movements, the group’s regulatory capital value (a key valuation benchmark) was in line.
Crucially, UBS notes that the company does not expect to impose water restrictions this year, a positive signal amid public scrutiny of utility firms. Although past flooding incidents have triggered performance penalties, 70% of its operational delivery incentives (ODIs) remain on track or ahead.
Looking ahead, the company expects a strong lift in earnings before interest, tax, depreciation and amortisation (EBITDA) in the coming year (a rise of around two-thirds), driven by cost controls and lower financing costs.
That improvement supports a dividend yield of nearly 6%, among the highest in the sector.
Pennon shares still trade at a modest premium to their regulated asset base, well below rivals Severn Trent and United Utilities.
UBS expects a more definitive view to emerge once two ongoing regulatory investigations are resolved. For now, the tone is one of cautious optimism.
