After an eight-month climb that has lifted Pennon Group PLC (LSE:PNN, OTC:PEGRY) shares by nearly 30%, Citi thinks it is time for a breather.
The broker has cut the South West Water owner to 'neutral', arguing that the stock’s recovery and falling gilt yields have already done most of the heavy lifting.
Pennon’s shares, it notes, still trade at one of the slimmest premiums to their regulatory asset base, about 7% on March 2027 estimates, among Europe’s listed utilities, and the lowest in the UK.
Even so, Citi sees little room for another near-term re-rating. The shares are now factoring in a return on regulated equity (RoRE) of roughly 5.5%, short of management’s 7% target, and not yet reflecting the 0.3 percentage points of bonus returns available if the company hits top marks from the Environment Agency.
Risks are also creeping in. The upcoming UK Budget could bring changes to energy affordability schemes or rates policy that unsettle the sector. There is also the uncertainty of a new chief executive possibly revisiting operational goals on arrival.
Citi’s view is not a call on disaster, more a pause for thought. To justify further gains, Pennon will need to show steady operational delivery and progress on its environmental performance.
For now, after a strong run and with sentiment improving across utilities, the easy wins look to be behind it.
The shares fell 1% to 513p.