Pennon Group PLC (LON: PNN)

Pennon Group PLC (LON: PNN) is an FTSE 250-listed Environmental Infrastructure Company, which provides services related to waste management, water & wastewater, and water retail services. PNN also holds an interest in Pennon Water Services Limited, which is engaged in providing water and wastewater retail services to non-household customer accounts across the UK.

On 01 April 2022, the Company will release a trading statement. 

Recent trend of dividend payments

The Company will pay an interim dividend of 11.70 pence per share attributable for H1 FY22 on 05 April 2022, while the ex-dividend date was 27 January 2022. It remained around 4.9% ahead of the interim dividend paid for the prior year.

(Data Source: LSE Website, Research done by Kalkine Group)

Growth Prospects

• Capital Distribution: Pennon has paid £1.5 billion of the special dividend, while it has completed the share consolidation. The share buyback of £400 million is still underway.
• Driving Sustainable Growth: The Company is aiming to gain more than 30% total Regulatory Capital Value (RCV) growth to 2025 through organic investments and acquisitions. Furthermore, PNN also planned for £82 million of Green Recovery investment.

Key Risks 

• Federal Meeting: As the Federal Meeting has signalled the interest rates hike and monetary policy tightening, it can keep the equity market under pressure.
• Inflation Concern: Due to the inflationary pressure, the Bank of England increased the Bank Rate by 25 basis points to 0.50%. It can keep the equity market under pressure amid the rising US Dollar index.
• Sluggish UK Macroeconomic Indicators: The UK Composite PMI fell marginally to 53.4 in January 2022 from 53.6 in December 2021, while the UK consumer price inflation breached a nearly 30-year high of 5.4% in the 12 months to December 2021.
• Business Risk: The 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.

Key fundamental and shareholders statistics of Pennon Group PLC. 

BlackRock Advisors (UK) Limited is the most significant shareholder as it holds nearly 16.28 million shares as of 31 December 2021.     

H1 FY22 Financial Highlights (for the half year ended 30 September 2021, as on 30 November 2021)

(Source: Company Filings)

• Decent Top-Line Business: The Company posted revenue of £389.3 million in H1 FY22 against £319.7 million in H1 FY21, illustrating an increase of around 21.8%, with Bristol water contributing £41.6 million.
• Robust Profitability: The profit before tax went up by around 4.3% during H1 FY22.
• Acquisition: Bristol Water had made significant contributions of £7.2 million in profit and capital investment of £12.7 million during H1 FY22.

 Financial Ratios (H1 FY22)

Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 11 February 2022 at 11:28 AM GMT, PNN’s shares were trading at GBX 1,036.00, down by around 1.01% against the previous day closing price. Stock 52-week High and Low were GBX 1,335.00 and GBX 880.37, respectively.

On a daily chart, the stock price is hovering between the lower Bollinger band and the middle Bollinger band. Hence, there could be an uptick in the stock price in the near term. Meanwhile, the 14-days RSI of~30.02 indicates a bullish price momentum. 

Valuation Methodology: Price/Earnings Approach (FY22E) (Illustrative) 

Business Outlook

The Company had produced a stellar financial performance for the first half of FY22. Moreover, the Company has collaborated with the University of Exeter, the Centre for Resilience in Environment, Water and Waste (CREWW), and produced results while working with its partners, in securing four Ofwat Innovation Fund projects totalling over £20 million due to commence in the first quarter of 2022. Furthermore, the Group announced to begin a process to purchase ordinary shares at the cost of £400 million by September 2022. In a nutshell, PNN remained on track to deliver resilient financial performance in line with management expectations during FY22. 

Considering the solid H1 FY22 business performance, robust profitability margins, acquisition benefits, consistent dividend payments, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Pennon Group PLC at the current price of GBX 1,036.00 (as on 11 February 2022 at 11:28 AM GMT), with lower-double digit upside potential based on 23.34x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios. 

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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