Slimmer post-Viridor Pennon boosts dividend

While visitors to the south-west of England clogged up the region's narrow country lanes with their Range Rovers over the summer, water utility Pennon (PNN) was also worried about blockages: the South West Water and Bristol Water owner said it had had to “mitigate surges” in the network that came from “significant levels of tourism seen in 2021”, to avoid flooding and wastewater issues. 

The company said it managed this successfully, with flooding incidents and sewer collapses down on last year. Less appetising for those living in (or just visiting) the south-west was the data on river health. Pennon said just a fifth of rivers and waterways in the region “meet good ecological standards”, although this is better than the English average of 16 per cent. 

The company’s sales and industry metrics, such as the ‘outcome delivery initiative’ (ODI), based on Ofwat targets, and shareholder returns as a percentage of regulated equity (RORE), showed improvement for the six months to 30 September, although the ODI was still knocked by pollution levels. 

Non-household water revenue was up almost a quarter on last year to £93m as business demand increased, and new acquisition Bristol Water contributed revenue of £42m. This is the first full set of interim numbers without Viridor, which Pennon sold to private equity fund KKR last year for £4.2bn, £1.5bn of which was handed to shareholders as a special dividend. 

Its post-tax profit – similar to Severn Trent (SVT) and United Utilities (UU.) – was much lower than the year before on the basis of a corporate tax treatment, although last year also had a helpful £1.7bn benefit from the Viridor sale. 

Consensus estimates compiled by FactSet see full-year EPS up by a quarter compared with last year, to 53p, but not yet getting back to the 2020 financial year level of above 60p until 2025. Even with heavy debt, regulated income and essential services with steady dividends look like a solid bet right now, even if the Viridor-linked payout bonanza is over. However, short of any further one-off largesse, the implied yield does not justify a buy call. Hold.

Last IC View: Buy, 1,084p, 4 Jun 2021