Stocks in Focus: Pennon Group

30/05/2018

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This week Alastair Macdougall of NW Brown looks at Pennon Group, which recently released its full year results to 31 March 2018.

The group is split between two main functions, water and sewage services the South West of England and Viridor, the UK’s largest waste management recycling company. 

Pennon’s results were met with a positive reaction from the market and shortly after the release the shares had risen by 5%. Pre-tax profits had risen by 25%, following strong performance from the Viridor and South West Water divisions, and the company confirmed another dividend rise of 7.3%.

Viridor accounts for 52% of the group’s revenues and within the results they announced that they have been encouraged by the ‘Blue Planet’ effect. Ever since the popular BBC program aired in late 2017, the country has gained focus on the need to control plastic consumption and to improve recycling efficiency. Viridor is at the forefront of this and are hoping that changes will be announced in the Resources & Waste Strategy later this year that will continue this momentum.

Despite these positive results, the sector still faces regulatory pressures and the utilities industry is set to see price controls from 2020. The price controls are based on the Regulatory Asset Base, this is a system designed primarily to encourage investment in the expansion and modernization of infrastructure.  However, these utility companies will work on an allowed rate of return in which they recoup the investment from consumers, therefore capping future income.

These pressures are affecting the whole industry but Pennon remains in a strong position. They have the best record of water quality and customer service in the sector and have less regulatory exposure than competitors due to the diversification offered by the Viridor business.

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