Credit Suisse downgrades Pennon as energy-from-waste loses its appeal

13th Jan 2017 09:58

(ShareCast News) - Credit Suisse has downgraded environmental utility infrastructure company Pennon Group to 'underperform' from 'neutral' and lowered the price target to 680p from 800p.The broker said that the downside in energy-from-waste (EfW) is materialising faster than it anticipated and it sees risk of a potential liability associated with an unconsolidated financing joint venture.The risks the bank forecasts with EfW include local authority counterparty risk, exposure to competitive pricing which analysts predict will intensify from 2020, execution risk on construction of the Glasgow pant and financing risk with a potentially expensive new hybrid. It added that it sees no drivers of sustainable medium-term upside to pricing.The earnings per share forecast fell to 35.59p from 36.69p for 2017.The cut in EPS by 3-4% and price target is primarily due to the bank's valuation of the company's subsidiary Virador, including the Greater Manchester contract and Avonmouth EfW.It also points to the company's Peninsula MB joint venture, estimating that loss of tax credits could reduce earnings per share (EPS) by around 7 to 10% per annum going forward.On the plus side the bank values the company's second subsidiary, South West Water (SWW) at a premium to reflect outperformance among its peers but sees bond yields as the main near term driver for UK Water valuations.The share price fell 3.57% to 780.10p at 1017 GMT on Friday.