On Monday, Barclays (LON:BARC) adjusted its stance on Pennon Group Plc (LSE:PNN) (OTC:PEGRF) stock, downgrading it from Overweight to Equalweight and reducing the price target to £6.85, a decrease from the previous target of £9.55. The revision comes as the firm anticipates lower return expectations for the water utility company, and notes concerns regarding the company's leverage.
According to Barclays, Pennon Group's leverage is approaching a threshold that the firm finds concerning, with debt levels close to 70% even after considering a potential dividend reduction in the upcoming Asset Management Plan period (AMP8).
The company's current trading level is at a 0% premium to its Regulated Capital Value (RCV), which indicates that the stock is priced in line with the underlying regulatory asset base.
Despite the downgrade, Barclays acknowledges that Pennon Group holds significant potential upside. The firm's analysis suggests that while there are opportunities for growth, these are contingent on a positive outcome, and the high leverage poses a risk to the company's financial stability.
The adjustment in Pennon Group's stock rating and price target reflects a more cautious outlook from Barclays on the company's financial performance prospects. The new Equalweight rating indicates a neutral position, suggesting that the stock is expected to perform in line with the market or sector averages.
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