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Goldman Sachs cuts Pennon Group target price after Viridor profits miss forecasts

Last updated: 09:09 25 Nov 2011 GMT, First published: 10:09 25 Nov 2011 GMT

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Yesterday's interim report from Pennon Group (LON:PNN) drew a mixed reaction from analysts as while Deutsche Bank repeated its "buy" rating, Goldman Sachs decided to reduce its price target for the utility group.

Deutsche Bank analyst James Brand retained his bullish stance on Pennon even though profits for the six months to end September at its waste management division Viridor reached £35.2 million, while Brand expected an increase from £33 million a year earlier to £37 million.

Brand also noted that Pennon cautioned investors that the current difficult economic conditions may have an impact on the division in the near term and reported that profit growth has declined in the second quarter compared to the first three months of the financial year.

“We expect more context to be given around these comments at the analyst meeting,” said Brand.

Still, Brand remained optimistic about the outlook for Viridor, which it said has the potential to grow strongly over the next few years despite the possibility of a slowdown in its growth rates in the short term.

As a result, Brand upheld his “buy” recommendation for Pennon and called the current share price “too cautious”.

Goldman Sachs analyst Fred Barasi was less positive about the outlook for Viridor, reducing its 12 month target price for Pennon from 721 pence to 697 pence, which, however, still represents a premium to yesterday’s closing value of 673.5 pence.

According to Barasi, the market is valuing Viridor at a substantial premium to its water and waste peers and discounts a significantly higher growth outlook than expected by the analyst.

“Viridor faces economic headwinds in the short term, and we have lowered our forecasts for Pennon to reflect this weaker outlook,” said Barasi, while also reiterating his “sell” recommendation for Pennon.

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