Having struck an agreement to sell its waste management business, Viridor, to private equity group Kohlberg Kravis Roberts, Pennon (PNN) will soon focus solely on its regulated water activities. In the year to 31 March, cash profits (Ebitda) from what will be the continuing group remained flat at £365m. Wetter weather reduced demand in the household-facing South West Water, offsetting higher retail revenues from the business-focused Water Services division.
In light of Covid-19, a £9m provision has been taken in expectation of customers being unable to pay their bills. While reduced commercial water usage is set to lower revenue by £10m this year, the regulatory model means the shortfall can be recovered in future years.
Key for income investors is what will happen to the dividend over the new five-year cycle, AMP7. Previously, the annual payout rose by 4 per cent above the retail price index (RPI). Moving forward, it will grow 2 per cent ahead of the ‘consumer price index including owner occupiers’ housing costs’ (CPIH), which is more generous than Severn Trent (SVT) and United Utilities (UU.). Still, removing Viridor’s contribution, the dividend will grow from a lowered base of 21.11p from this year.
The Viridor deal is due to complete in the summer, bringing net cash proceeds of £3.7bn. This should bolster the balance sheet – excluding lease liabilities and Viridor, net debt came in at £3bn last year. Some of the returns will also be distributed to shareholders, although the form of reward has yet to be decided.
| PENNON (PNN) | ||||
| ORD PRICE: | 1,145p | MARKET VALUE: | £ 4.8bn | |
| TOUCH: | 1,145-1,146p | 12-MONTH HIGH: | 1,211p | LOW: 695p |
| DIVIDEND YIELD: | 3.8% | PE RATIO: | 41 | |
| NET ASSET VALUE: | 337p | NET DEBT: | £3.0bn** | |
| Year to 31 Mar | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
| 2016 | 1.35 | 206 | 37.0 | 33.58 |
| 2017 | 1.35 | 211 | 39.8 | 35.96 |
| 2018 | 1.40 | 263 | 48.0 | 38.59 |
| 2019 (Restated*) | 0.63 | 201 | 38.2 | 41.06 |
| 2020 | 0.64 | 193 | 27.7 | 43.77 |
| % change | +1 | -4 | -27 | +7 |
| Ex-div: | 23 Jul | |||
| Payment: | 02 Sep | |||
| *Restated to reflect Viridor being considered discontinued, **Includes £1.7bn in lease liabilities | ||||
