ii view: Pennon contemplates record investment

Expanded by previous acquisitions but with its shares underperforming rival water companies over the last year. Buy, sell, or hold?

31st March 2025 16:16

Keith Bowman from interactive investor

Full-year trading update to 31 March

ii round-up:

Pennon Group (LSE:PNN) today guided to annual profit that will broadly match management expectations, with the water company preparing to execute record investment over the new five-year regulatory period to 2030.

Reduced customer demand under Pennon’s own "Water is Precious" campaign as well as inflationary cost pressures fed into similar adjusted profit (EBITDA) for both the first and second halves of the financial year. The group’s own efficiency programme is expected to help counter such pressures, with funds raised of £1.3 billion for the 24/25 full year, and including a recent rights issue, set to contribute to planned investments out to 2030.

Shares in the FTSE 250 company retreated 1% in UK trading having come into this latest news down around a tenth over the last year. That’s in contrast to flat share price performances for rivals Severn Trent (LSE:SVT) and United Utilities Group Class A (LSE:UU.). The FTSE 250 index is down around 1% over that time.

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Pennon provides clean water to a population of around 3.5 million people across the South West of England. Pennon previously flagged expected investment of £3.2 billion during the five-year regulatory period known as K8, up from £1.9 billion during K7.

Pennon expects non-underlying costs of £36 million for the full year to 31 March. That partly reflects the finalisation of its 2024 Brixham water supply incident and partly required restructuring costs.

More than £1 billion of investment programmes for K8 are now underway, with other priorities including a new £200 million customer affordability support package during the financial year to March 2026.

Results for 2024/2025 are scheduled for 3 June.

ii view:

Pennon Group came to the UK stock market in 1989 as South West Water. It later combined with Bournemouth Water to become Pennon Group. Today it employs around 4,000 people, with planned investments during the K8 period aimed at fixing storm overflows, building new reservoirs and creating natural habitats for wildlife.

For investors, operational issues such as the Brixham water supply incident in 2024 have led to fines and additional costs, hindering group performance. A previous cutting or rebasing of the dividend payment was announced. The water industry’s accountability and impact on the environment can not be forgotten, while periodic negotiations with Ofwat regularly increase investor uncertainty.

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

A forecast dividend yield of over 6% exceeds that of rival water operators, but it's been flattered by a steady and significant decrease in the share price over the past five years. Potential investors must decide whether to put their faith in management to improve performance and asset growth.

Positives:

Attractive dividend (not guaranteed)
Targeting cost savings from acquisitions

Negatives:

The weather can impact performance
Elevated net debt

The average rating of stock market analysts:

Strong hold

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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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