Pennon Group Plc

Pennon Group Plc (LON: PNN) is an FTSE 100-listed Environmental Infrastructure Company, which provides s to waste management, water & wastewater, and water retail services.

The Company will provide H1 2021 results on 24 November 2020.

Investment Highlights - Pennon Group Plc – Buy at GBX 983.96

• The Company remained on track to deliver resilient financial results in line with management expectations and is focused on sector-leading wastewater and water businesses.
• In the last one year, the Company delivered a decent return of ~ 11.94% and delivered higher returns compared to the benchmark Index (FTSE-100 Index).
• Over the course of 4 years (FY16 – FY20), the Company’s net profit surged from GBP 168.30 million in FY2016 to GBP 206.30 million in FY2020. Compounded annual growth rate (CAGR) stood at ~ 5.22%.
• From the technical standpoint, 14-day RSI is supporting an upside move (around 40 level), which means the stock price could increase in the short term.

Key Risks

• The Company is exposed to operational risk arising from customers with increased competition and poor operating performance due to climate change.
• Moreover, the economic conditions can lead to a non-recovery of customer debt and change in the commodity prices.

Recent News

On 23 October 2020, Pennon Group announced the launching of WaterShare+ Scheme. The scheme is developed based on feedback from South West Water customers. As per the scheme, few customers were able to elect to receive £20 in shares of the Company as an alternative to £20 credit on the bill.

Trading Statement for H1 FY2021 ending 30 September 2020(released on 25 September 2020)

• The trading for the period stood in line with the management expectations and is well-positioned to deliver resilient financial results.
• The impact of broadly in line with the initial assumptions for a net revenue impact of £10 million in FY2021, while cash collections remained robust.
• Led by efficient financing and totex, South West Water stays on track to deliver continued RORE (Return on Regulated Equity) outperformance.
• Pennon remains in a strong financial position with anticipated cash and committed facilities well over £3 billion as on 30 September 2020.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company is on track to deliver resilient financial results in H1 FY2021. The Company has a unique combination of environmental infrastructure assets, which has created significant shareholder value over the years. The Company aims to be the industry leader in the UK water industry, after the disposal of Viridor division. Pennon Group has received £3.7 billion as net cash proceeds from the sale of Viridor business. As of 30 September 2020, the Company expects to have cash and committed facilities over £3 billion, while the debt restructuring plan is going well. Going forward, the Company shall continue to pursue growth opportunities within the UK water industry, while returning attractive value to the shareholders. The stock made a 52-week low and high of GBX 865.70 and GBX 1,210.50, respectively.

Based on the above rationale and support from the valuation as done using the above method, we have given a “BUY” recommendation on Pennon Group Plc the current price of GBX 983.96 (as on 2 November 2020, before the market close at 8:20 AM GMT), with lower double digit upside potential based on 38.18x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.). 

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

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

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