Stocks in Focus: Pennon Group


04-12-2019
close up of water and waste pipes

This week Girish Ramrous of NW Brown Wealth Management looks at water and waste management company, Pennon, which recently published its half year results for the six months ended 30 September 2019.

Despite making lower underlying revenue compared to the same period last year, pre-tax profit was up 0.8% supported by higher profits in waste management.  Management increased the interim dividend by 6.4% to 13.66p per share. Overall, it was an encouraging set of results and the share price rose following the announcement.

The waste management division, Viridor, saw revenues fall driven by the end of a recycling contract and lower landfill volumes from the closure of two sites. However, pre-tax profits were 15% higher as the Energy Recovery Facility business continued to perform strongly.

On the water side, the group’s rigid cost control has helped generate some of the best regulated returns in the sector, whilst service levels have earned rewards from the industry regulator Ofwat. Pennon's plans have received approval from the regulator and management is confident that the water side can continue to outperform in the next regulatory cycle (2020-2025), which is expected to be tougher. Revenue from the newer Pennon Water Services (business water supplier) rose 3% with lower pre-tax losses because of lower costs.

The upcoming general election is a reminder that some headwinds are out of Pennon’s control. The Labour Party’s nationalisation plans may not reflect the sector's market value and this has been the main driver of uncertainty over the past couple of years. Pennon’s management has said previously that it does not want to be too distracted by potential political decisions and instead wants to focus on running a good business that delivers strong results in the right way. The group is currently undergoing a strategic review and further details are expected next year.

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