Pennon Group PLC (LON:PNN) has been upgraded to ‘neutral’ from ‘underperform’ by Credit Suisse following the £4.2bn sale of its Viridor waste management arm.
The Swiss giant also hiked its target price for the water group to 1,035p from 700p as the deal, inked with private equity firm KKR, was £1.7bn above the investment bank’s valuation.
READ: Pennon reassures on liquidity amid coronavirus crisis, promises new dividend policy
In a note to clients, Credit Suisse's analysts pointed out that if all the cash was returned to shareholders, Pennon's earnings per share (EPS) could rise by 8% from 2022.
“On our calculations, Pennon can afford to pay up to £2.25bn to shareholders, after repaying around £1.5bn of debt,” analysts said.
However, the utility firm has said it may keep funds for future opportunities, which Credit Suisse's analysts said they are not ruling out, though the only area “with a strong strategic rationale” would be in UK water.
In terms of dividend, the FTSE 100-listed firm “does not need to pass” it, the analysts added, although the sector may be pressured to do so.
Pennon shares were 1% lower at 1,080p late morning on Tuesday, still above Credit Suisse's increased target price.