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Pennon sees rapid growth from ERFs

The water group’s waste business has seen returns jump in the period
November 27, 2018

As the current five-year regulatory cycle approaches its end in December of next year, water companies are pushing their credentials in the hope that the regulator will look favourably on their draft business plans in its initial assessment at the end of January. Pennon’s (PNN) plan was awarded ‘enhanced’ status for the current cycle, and management is keen to repeat that success. These half-year numbers should help, with the group achieving its highest ever customer service score and a cumulative return on regulated equity - a key metric for water utilities - of 11.8 per cent.

IC TIP: Buy at 765p

The future performance of the water business now sits in large part with the regulator, but while it is making its assessments, waste management business Viridor looks to be performing well. Cash profits reached £78.4m in the first half of the year - equivalent to 27 per cent of the adjusted total, up from 23 per cent in the same period last year. Most of Viridor’s returns come from its energy recovery facilities, which have been ramping up rapidly. Three out of a total of four new facilities are now operational, generating a 29 per cent increase in profits in the period. Management remains confident in the long-term prospects for this part of the business, forecasting a capacity gap of more than 7m tonnes for energy recovery facilities (ERFs) by 2030.

Bloomberg puts the consensus EPS forecast at 52.2p for the March 2019 year-end, up from 50.9p in FY2018.

PENNON (PNN)    
ORD PRICE:765pMARKET VALUE:£ 3.22bn
TOUCH:764.6-765.4p12-MONTH HIGH:816pLOW: 577p
DIVIDEND YIELD:5.2%PE RATIO:15
NET ASSET VALUE:309p*NET DEBT:190%
Half-year to 30 SepTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201772713021.811.97
201874713425.612.84
% change+3+3+17+7
Ex-div:24 Jan   
Payment:4 Apr   
*Includes intangible assets of £458m, or 109p a share