On Friday, UBS made adjustments to its valuation of Pennon Group Plc (LSE:PNN) (OTC:PEGRF) shares , a UK-based water utility company. The firm's analyst revised the price target downwards to £8.70 from the previous £8.90. Despite the reduction, UBS continues to recommend a Buy rating on the stock.
The revision follows the release of Pennon Group's financial results for the fiscal year ending March 2024. The analyst at UBS has recalculated the sum-of-the-parts (SOTP) based price target, now accounting for increased capital expenditures (capex) impacting the total expenditure (totex) sharing mechanism. This adjustment reflects the additional investments that the company is expected to make.
Alongside the price target change, UBS has increased its earnings per share (EPS) estimates for Pennon Group for the years 2025 and 2026. The new projections are higher by 2.4 pence and 4.4 pence respectively, mainly due to anticipated lower operating costs in the coming years.
The UBS analyst also provided insights into the valuation of Pennon Group relative to its peers. The firm views Pennon as the least expensive among the UK regulated utility businesses. The current stock price is believed to factor in potential future developments, such as a possible one-third cut in dividends.
This would be a strategic move to reduce debt levels and finance total expenditures for the next regulatory price control period, which spans from April 2025 to March 2030. The details of this next price control are expected to be announced on July 11.
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