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Pennon: rosy outlook for water and waste

The utilities giant enjoyed strong cash profits growth across both water and waste
May 25, 2018

Pennon’s (PNN) shares were marked up on solid full-year numbers, bolstered by a generous dividend hike and the suggestion of a positive outlook for water and waste. True, pre-tax profit benefited from a non-underlying pre-tax credit of £4.1m, against a £39.5m charge in FY2017, but adjusted profit still came in 3.5 per cent to the good at £259m.

IC TIP: Buy at 769p

South West Water saw revenue rise 2.9 per cent to £571m, buoyed by net tariff increases and a fractional lift in customer demand (net of meter switches). Cash profits here were up 3.8 per cent to £361m, with higher sales offsetting greater operating costs. Overall, the business maintained its “sector-leading” return on regulated equity – a key metric for water companies. Meanwhile, a licence expansion covering the Isles of Scilly should entail £40m in investment by 2030.

Cash profits for waste management division Viridor rose 8.6 per cent to £150m – driven by 15.7 per cent growth from energy recovery facilities (ERFs). Momentum here looks set to gather, with three further ERFs being commissioned and one under construction. Encouragingly, Pennon expects demand for ERFs to exceed capacity significantly by 2030.

Prior to these figures, broker Macquarie anticipated EPS of 51p for the year to March 2019 (from 48p in FY2018)

PENNON (PNN)    
ORD PRICE:769pMARKET VALUE:£3.23bn
TOUCH:769-770p12-MONTH HIGH:971pLOW: 762p
DIVIDEND YIELD*:5%PE RATIO:16
NET ASSET VALUE:319p*NET DEBT:171%
Year to 31 MarTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20141.3215938.830.31
20151.3619732.331.80
20161.3520637.033.58
20171.3521139.835.96
20181.4026348.038.59
% change+3+25+21+7
Ex-div:5 Jul   
Payment:4 Sep   
*Includes intangible assets of £458m, or 109p a share