ii view: investors unimpressed with Pennon's results

Shares in this FTSE 250 water company have outperformed the wider index year-to-date. Analyst Keith Bowman reviews prospects.

3rd June 2025 15:46

Keith Bowman from interactive investor

Full year results to 31 March

Underlying revenue up 15% to £1.05 billion
Adjusted profit (EBITDA) down 0.8% to £336 million
Statutory loss of £73 million, increased from a loss of £9 million the year before
Final dividend of 19.43p per share
Total dividend for the year of 31.57p per share
Net debt of £4.07 billion, up from £3.8 billion a year ago

Chief executive Susan Davy said:

"Pennon has delivered a resilient operational performance during a demanding year, while building a robust platform for the future. We have reshaped and reset the cost base, delivered record levels of capital investment and - following a successful rights issue - maintained a strong balance sheet.”

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ii round-up:

Pennon Group (LSE:PNN) today detailed adjusted profit that matched City forecasts, with the owner of South West Water predicting a two-thirds increase for the year ahead given higher revenues and reduced costs.

Adjusted profit (EBITDA) for the year to late March fell 0.8% to £335 million, but with an unadjusted pre-tax loss of £73 million worse than the £9 million loss the previous year, driven by costs to fix a water infection, which Pennons refers to as "the Brixham water quality event". A final dividend of 19.43p per share is payable to eligible shareholders on 4 September.

The results came on the same day as an initial report by the newly established Independent Water Commission (IWC) recommended stronger water industry regulation.

Shares in the FTSE 250 company fell 2% in UK trading having come into these latest results up by around a tenth so far in 2025. That’s ahead of a near 2% gain for the FTSE 250 index itself year-to-date. Fellow water companies Severn Trent (LSE:SVT) and United Utilities Group Class A (LSE:UU.) are up by a similar in 2025.

In January, Pennon strengthened its balance sheet via a £490 million rights issue. Pennon and rivals are now commencing investment plans under regulator Ofwat’s recently commenced five-year period to 2030.

Pennon plans to spend £3.2 billion during the five-year regulatory period known as K8 on initiatives including reducing spills from storm overflows and improving water treatment facilities. That’s up from £1.9 billion in K7.

Final recommendations from the IWC, led by former Bank of England deputy Governor Jon Cunliffe, are expected later this summer.

Broker Morgan Stanley reiterated its ‘equal weight’ stance on Pennon shares post the results.

ii view:

Pennon Group came to the UK stock market in 1989 as South West Water. It later combined with Bournemouth Water, becoming Pennon Group. In 2020, it agreed to sell its waste management business Viridor, later returning funds to shareholders. Its relatively recent acquisition of Sutton and East Surrey (SES) water added a further 750,000 customers to the 1.2 million it acquired under its 2021 acquisition of Bristol Water.

For investors, possible new plans to be announced by the IWC could impact financial performance going forward. The water industry’s accountability and impact on the environment cannot be overlooked. Operational issues such as the Devon water parasite incident in 2024 have led to fines and additional costs, while net debt of £4 billion compares to a stock market value of £2.3 billion.

On the upside, the relative defensiveness of a utility operator, given that we all need water no matter what the health of the economy, offers appeal and backing to dividend payments. Record investment is now being made in improving operational efficiency. A series of acquisitions have offered cost savings opportunities, while management continues to target the retaining of a Baa1 credit rating over the K8 regulatory period.

In all, and while potential changes in regulation via the IWC cannot be ignored, a forecast dividend yield of around 6% is likely to interest income investors.

Positives:

Attractive dividend (not guaranteed)
Planning record investment

Negatives:

The weather can impact performance
Elevated net debt

The average rating of stock market analysts:

Strong hold

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Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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