Pennon Group PLC

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 will pay a final dividend of 14.97 pence per share on 02 September 2021, while the ex-dividend date will be 22 July 2021.

The Annual General Meeting of PNN will be held on 22 July 2021.

Investment Rationale for Valuation – SELL at GBX 1,265.00

• The UK Environmental Agency had blasted PNN’s South-West Water for pollution failings for the 10th year in a row.
• On the profitability front, the profit before tax of PNN had demonstrated a downtrend during FY21.
• The Company had anticipated a reduction in net cash during FY22.
• PNN will become an ex-dividend after 22 July 2021.
• The stock is trading very close to the 52-week high of GBX 1,269.00, which would make it difficult for the stock price to show any further upside potential.
• From a technical standpoint, PNN is hovering around the upper Bollinger band, indicating that the stock is overbought and does not support upside potential.
• Moreover, the 14-day RSI of ~74.84 is indicating an overbought zone.

Key Risks

• The recent outbreak of the Covid-19 pandemic had caused PNN’S AGM to be held on a remote basis.
• The market conditions in which the company operates is full of challenges and might impact the operational performance and reduce financial performance as well.
  

Recent Developments 

On 03 June 2021, PNN had completed the acquisition of Bristol Water Holdings UK Limited for an equity value of £425 million and an enterprise value of £814 million. 

FY21 Financial Highlights (for the period ended 31 March 2021 as on 03 June 2021)

(Source: Company Result)

• PNN had completed the disposal of Viridor for an enterprise value of £4.2 billion in July 2020.
• After making significant gain from the sale of Viridor, PNN had declared a special dividend of 355 pence per share for the shareholders.
• The underlying profit before tax remained around £157.0 million during FY21.

One Year Share Price Chart

 (Source: REFINITIV; Analysis done by Kalkine Group)

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

Conclusion

The Company had proposed an on-market share buy-back program of up to £0.4 billion expected to be held by September 2022. Moreover, PNN had returned around £1.5 billion to shareholders in the form of a special dividend. However, PNN had witnessed a drop in profitability during FY21. Currently, the stock is hovering around the 52 weeks high, making a lucrative exit point for the investors to book profit. The stock made a 52-week low and high of GBX 880.37 and GBX 1,269.00, respectively.

Based on the weak technical indicators and unfavourable valuation as done using the above method, we have given a “SELL” recommendation on Pennon Group PLC at the current market price of GBX 1,265.00 (as of 20 July 2021 at 11:05 AM GMT), while we will suggest reinvesting once we identify fresh growth catalysts for PNN. 

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peers/ Industry information have been taken from REFINITIV.

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

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