Pennon Group PLC has been granted an upgrade by RBC analysts on signs of growing regulatory certainty and stronger earnings across the sector ahead.
Return on retained earnings was forecast to average 8% to 9% among listed names over the coming AMP8 regulatory period from 2025 and 2030, analysts said in a note.
Pennon was set to enjoy the largest improvement under the new regime, which was confirmed by regulator Ofwat in December, the bank added.
Analysts upgraded Pennon to ‘outperform’ as a result, as Severn Trent PLC was kept at ‘sector perform’ and United Utilities Group PLC at ‘outperform’.
“All three companies now trend on a similar path across AMP8 in terms of balance sheet,” RBC noted.
“A credit rating limit of [around] 67% to 68% net debt to regulatory capital value means that companies retain headroom on our numbers.”
RBC also noted upcoming results from an Ofwat environmental investigation and February 10’s bid deadline for Thames Water was set to provide clarity for the sector before the next regulatory period.
“We would expect that AMP9 will be defined by a material capex cycle; however, questions regarding the balance sheet and regulatory risk should be off the table now for a number of years.”