Pennon's underlying half year revenue fell 4.6% to £712.4m, with lower revenues in both water and waste management businesses. However, underlying profits before tax rose 0.8% to £143.7m buoyed by higher profits in waste management.
The interim dividend rose 6.4% to 13.66p per share.
The shares rose 2.1% following the news.
As with most utilities, the potential for a reliable income is Pennon's main attraction. However, waste management division Viridor means there's a bit more under the bonnet than your average water utility.
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. Pennon has proven adept at controlling cost, and the addition of new facilities means this side of the business has seen profits grow.
The 'Blue Planet' effect is proving something of a tailwind at moment, with waste disposal higher up the political agenda than it has been for years. A new plastics recycling facility at Avonmouth is the group's first effort to capitalise on that opportunity.
However, recent history shows there are potential trip wires. Management have found recyclate pricing doesn't have the same regulation-induced predictability as water, although are hopeful conditions will improve as recycling becomes ever-more important.
While Viridor tends to get the headlines, the majority of profit is still generated in the regulated water business. And it's this that has underpinned the current dividend policy which lasts to 2020 - namely to increase the payout by RPI inflation plus 4 percentage points each year.
The group's built a good record in its core business. Rigid cost control has helped generate some of the best regulated returns in the sector, while service levels have been good enough to earn rewards from Ofwat.
While the next regulatory cycle (2020-2025) is expected to be tougher, Pennon's plans have received approval from the regulator and the group's confident it can continue to outperform. It would be remiss not to mention the ongoing nationalisation debate though.
The Labour Party has proposed nationalising the water sector for the first time in decades, and at a price that might not reflect the sector's current market value. Of course there are lots of ifs and buts, but it's something that should be kept in mind nonetheless.
Pennon deserves credit for its achievements, but in an increasingly political environment there are some headwinds that are out of its control. That's pushed the prospective yield up to 4.9%.
Half Year Results
South West Water saw revenues fall 2.9% to £292.9m and profit before tax come in 3.7% lower at £96.2m. The decline was driven by a fall in customer demand compared to last year's hot and dry summer. Operating costs fell 3.4%, reflecting continued efficiencies and no extreme weather.
Operational performance for the half-year resulted in a net Outcome Delivery Incentive reward of £1.7m, bringing the cumulative reward for the 2015-20 period to £13m. Customer service levels were maintained, with lower instances of pollution, flooding and leakage.
Viridor revenues fell 8.1% to £388.1m, driven by the end of a recycling contract in Greater Manchester and lower landfill volumes from the net closure of two sites. However, pre-tax profits were 15.7% higher at £41.5m, as the Energy Recovery Facility (ERF) Business continues to perform strongly and Pennon increased its stake in the Runcorn ERF to 75%.
Revenue from Pennon Water Services rose 3% to £86.6m with lower pre-tax losses at £0.3m, thanks to reduced costs.
Despite an increase in operating cash flows, net debt rose 8.4% to £3.3bn versus the prior year, reflecting cotinued investment and a change to the way the company now has to account for leases. Excluding the accouting change net debt rose 3.2%.
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.
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