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Pennon Group (PNN) Ord 40.7p Shares

Sell:779.60p Buy:780.20p 0 Change: 14.00p (1.76%)
FTSE 250:0.94%
Market closed Prices as at close on 21 June 2018 Prices delayed by at least 15 minutes | Switch to live prices |
Change: 14.00p (1.76%)
Deal now Deal for just £11.95 per trade in a ISA, Lifetime ISA, SIPP or Fund & Share Account
Market closed Prices as at close on 21 June 2018 Prices delayed by at least 15 minutes | Switch to live prices |
Change: 14.00p (1.76%)
Market closed Prices as at close on 21 June 2018 Prices delayed by at least 15 minutes | Switch to live prices |
Deal now Deal for just £11.95 per trade in a ISA, Lifetime ISA, SIPP or Fund & Share Account
The selling price currently displayed is higher than the buying price. This can occur temporarily for a variety of reasons; shortly before the market opens, after the market closes or because of extraordinary price volatility during the trading day.

HL comment (25 May 2018)

Pennon reported a 2.9% increase in revenue in the year, with underlying profits before tax up 3.5% to £258.8m as both South West Water and Viridor delivered positive results.

The group announced a final dividend of 26.62p per share, taking the dividend for the full year to 38.59p, up 7.3% and in line with the policy of growing the dividend 4 percentage points above RPI inflation.

The shares rose 6.4% in early trading.

Our view

Pennon consists of two main divisions; water and waste management.

The core water business has delivered impressive results. A rigid control of costs has allowed it to generate some of the best regulated returns in the sector, while also earning rewards from Ofwat for exceeding targets.

Viridor collects household waste, sorts it, then recycles as much as possible. The residual waste is burned in energy recovery facilities (ERFs) to generate electricity. Progress here hasn't been entirely smooth, with construction of the facility at Glasgow encountering problems. Pricing also looks difficult, but cost savings are helping Pennon cope with the pressures.

However, the regulated water business remains the senior partner, and is therefore crucial to the group's dividend plans. As with most utilities, the potential for the stock to yield a reliable income is probably the main attraction.

The prospective yield is 5.7% and the plan is to increase the payout by RPI inflation plus 4 percentage points each year. Pennon's continued delivery of double digit return on regulated equity supports these goals. Regulatory conditions are expected to be tougher from 2020 though, and we haven't had an update on what that might mean for the dividend yet.

There's a couple of other clouds on the horizon too. The political climate is far from welcoming, with a debate about nationalisation resurfacing for the first time in decades. In addition, UK interest rates now look like they might rise quicker than expected, which has also impacted the shares.

Higher rates mean the interest on parts of Pennon's debt becomes more of a burden, and increases the appeal of bonds, traditionally the preserve of income-seeking investors, relative to income led stocks and shares.

The twin headwinds of the regulator and interest rates could cause the share price to shift. But putting the external pressures to one side, which Pennon can't control in any case, operating performance remains solid. That should mean the dividend is well underpinned - for now at least.

Register for updates on Pennon

Full Year Results

Revenues rose 2.9% at South West Water to £571m. A more modest increase in costs, up 1.3%, supported a 4.7% increase in profit before tax, to £181m. The division received £2.6m in net ODI (outcome delivery incentive) payments from the regulator following a good performance in areas from water quality and leakage to sewer flooding.

Waste management business Viridor saw revenues slip 1% to £786m, but profits before tax rose 17.2% to £70.8m as availability of the groups Energy Recovery Facilities (ERFs) improved.

Operational ERFs now have a total capacity of 2.1 million tonnes, with four more facilities under construction. Landfill volumes declined slightly, with average fees unchanged, while recycling markets have remained challenging.

Group capital expenditure was 3.5% ahead of last year at £398.2m, driven by a £167.6m investment in the Viridor ERF portfolio - although Pennon expects to be able to recover £68.7m of this from Interserve following trouble with the construction of the Glasgow ERF. South West Water's capital expenditure for the year was £184m, slightly behind last year.

The Return on Regulated Equity, as calculated by regulator Ofwat, improved by 1 percentage point to 12.5%.

Pennon expects investment between 2020 and 2025 to hit £1bn, in line with the new PR19 regulatory environment.

Net debt rose 5.1% to £2.8bn, while interest costs rose £15.7m to £74.5m as the cost of index linked debt rose.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

Previous Pennon Group updates

Data policy - All information should be used for indicative purposes only. You should independently check data before making any investment decision. HL cannot guarantee that the data is accurate or complete, and accepts no responsibility for how it may be used.
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