Pennon Group PLC (LON: PNN) – Continued operational excellence and sector leading dividend policy.

Founded in 1989, Pennon Group PLC is a FTSE 250-listed Environmental Infrastructure Company, which provides services related to waste management, water & wastewater, and water retail services. It operates through three businesses – Pennon Water Services Limited, South West Water Limited, and Viridor Limited. The Company’s waste management service is involved in the transformation of waste into energy, recycles, and raw materials. The water & wastewater services manage wastewater improvement and water services for drinking. The water retail service is engaged in providing water retail and consultancy services to non-household customers in Great Britain.

On 3 June 2021, Pennon Group expects to announce FY21 results, while the annual general meeting is scheduled on 22 July 2021.

 (Source: Company Presentation)

Dividend Track Record

In FY20, Pennon Group declared a higher dividend growth of 6.6% (with a total dividend of 43.77 pence per share) against FY19. In H1 FY21, the Company declared an interim dividend per share of 6.77 pence, which was paid on 1 April 2021 to the shareholders on the register on 29 January 2021. Pennon Group also offers an opportunity to invest their dividend in a Dividend Reinvestment Plan. The annualised dividend yield stood at around 3.64%.

(Source: Company Presentation)

Growth Prospects and Risk Assessment

The Company has 23 raw water reservoirs, with a network of 17,515 km (kilometre) wastewater mains and 18,370 km of drinking water mains to serve around 2.2 million customers annually. Going forward, with the disposal of Viridor business, the Company has created a substantial headroom for pursuing growth opportunities and reorganising the capital structure to generate significant shareholders’ value. Moreover, the business has been resilient during the Covid-19 disruption while maintaining a strong funding and liquidity position. It is capitalising on synergies, best practice, capabilities, and strengths to achieve a leading position in UK infrastructure. PNN is seeking growth opportunities through increased investment in asset portfolio, expansion of customer base and partnerships with other Companies.

However, there are certain risk and uncertainties to business growth. It is exposed to operational risk arising from a loss of customers with increased competition and poor operating performance due to climate change. Moreover, the unfavourable economic conditions can lead to a non-recovery of customer debt and change in commodity prices. It also operates in a strict regulatory framework, which can affect the pricing and performance. Furthermore, revenues generated by recycling and energy businesses can be affected by a decrease in the power prices, reduced global demand for recycled commodities and continued austerity measures undertaken by the local authority.

Now will analyse some key fundamental and shareholders statistics of Pennon Group PLC.

Trading Statement for the full year ended 31 March 2021 (as on 30 March 2021)

• The Company is on track to unveil FY21 results in line with management expectations.
• The £3.7 billion net proceeds from the disposal of Viridor shall create accretive growth opportunities and establish a sustainable capital structure.
• With liquidity (cash and committed facilities) over £3 billion at the end of FY21, Pennon demonstrated a strong financial position.
• During H2 FY21, Pennon also witnessed a net increase in demand despite the Covid-19 related restrictions since the decline in non-household demand was offset by the increased household demand.

Financial and Operational Highlights for the period ended 30 September 2020 (H1 FY21) (as on 24 November 2020)

(Source: Company Website)

• With net cash proceeds of £3.7 billion on Viridor’s disposal, Pennon realised a profit of £1.7 billion. The sale led to the
  • Repayment of £0.75 billion debt until H1 FY21.
  • Contribution of £36 million to Pennon's principal pension scheme.
  • Availability of £2.7 billion headroom for further investment, which underpins growth potential.
• The financial and operational performance remained resilient despite Covid-19 challenges, which ensured a decent dividend policy.
• Regarding the net cash position as of 30 September 2020, the cash generation remained robust with further reduction in net debt. The net cash position at the end of H1 FY21 was £37.9 million.

Financial Ratios (H1 FY2021)

 (Source: Refinitiv, Thomson Reuters)

Share Price Performance Analysis

(Source: Refinitiv, Thomson Reuters)

On 16 April 2021, at the time of writing (at 9:10 AM GMT), PNN’s shares were trading at GBX 1,026.00, down by 0.24% against the previous day closing price. Stock 52-week High was GBX 1,195.50 and Low of GBX 854.20, respectively.

From the technical standpoint, PNN's prices reversed from the lower levels after forming a Morning Star candlestick pattern (bullish reversal) on a weekly chart and indicating an upside movement for the stock. Prices also broke a downward sloping trendline by the upside and supporting a positive stance for the stock. The momentum indicator RSI (14-period) is trading at ~59.20 levels and 21-period SMA is below CMP, both further appear supportive for an upward direction.

In the last two years, Pennon Group PLC share price has delivered nearly 39.06% return as compared to around 13.20% return of FTSE 250 index and around 6.40% return of FTSE All-Share Gas Water & Multi-utilities index, which shows that the stock has outperformed the benchmark index and the sector.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

Pennon is on track to deliver resilient financial results in FY21. The Company has received £3.7 billion as net cash proceeds pertinent to the sale of Viridor business. It has a unique combination of environmental infrastructure assets, which has created significant shareholder value over the years. Moreover, it has a liquidity of over £3 billion (as on 31 March 2021), which underpins the potential to pursue growth opportunities. In a nutshell, the Company aims to be the industry leader in the UK water industry, after the disposal of Viridor division. The defensive business nature of the Company is allowing shares to uphold despite free fall in the broader market space.

 (Source: Company Presentation) 

Considering the solid financial position, high level of cash generation capabilities, strong relationship with customers and support from the valuation as done using the above method, we have given a “BUY” recommendation on Pennon Group at the current price of GBX 1,026.00 (as on 16 April 2021, at 9:10 AM GMT), with lower-double digit upside potential based on 41.66x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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