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Pennon recycles waste into profits

The group’s waste management division is driving earnings growth with increasing demand for energy recovery facilities
June 3, 2019

Pennon (PNN) offers a slightly different proposition to its fellow water companies in that more than half of its revenue comes from its waste management division, Viridor. With adjusted cash profits from the segment surging by almost a fifth to £179m in FY2019, growth was driven by demand for energy recovery facilities (ERF) - transforming waste into electricity and heat.

IC TIP: Buy at 728p

As the annual gap between combustible residual waste and ERF capacity is expected to remain at around 7m tonnes until 2035, the group has invested £208m in increasing existing capacity, bringing three facilities into operation and constructing another at Avonmouth.

Meanwhile, South West Water secured its highest net outperformance delivery incentive (ODI) reward of £4.1m, maintaining a cumulative return on regulatory equity (RoRE) of 11.7 per cent. Having been awarded fast-track status for the next regulatory period, AMP7, its 'New Deal' includes proposals to allow customers to become shareholders – management regards nationalisation as “something we cannot particularly influence”. 

Bloomberg consensus forecasts indicate adjusted pre-tax profit of £286m and EPS of 59.1p in 2020, up from £270m and 54.7p in 2019.

PENNON (PNN)   
ORD PRICE:728pMARKET VALUE:£ 3.06bn
TOUCH:727.8-728.2p12-MONTH HIGH:815pLOW: 681p
DIVIDEND YIELD:5.6%PE RATIO:14
NET ASSET VALUE:330p*NET DEBT:£3.1bn
Year to 31 MarTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20151.3619732.331.80
20161.3520637.033.58
20171.3521139.835.96
20181.4026348.038.59
20191.4826051.141.06
% change+6-1+6+6
Ex-div:25 Jul   
Payment:03 Sep   
*Includes intangible assets of £477m, or 113p a share