Pennon Group PLC

Pennon Group PLC (LON: PNN) is an FTSE 250 listed company and is engaged in the utilities and water business.

The company will announce its FY22 results ended 31 March 2022 on 31 May 2022.

Investment Rationale for Valuation – Buy at GBX 1,031.00

• Trading Update: On 12 April 2022, the Group has released a trading update for the year ended 31 March 2022 and has updated that it remains on track to deliver decent performance during the year and in line with management expectations.
• Merger News: The company has received CMA’s clearance for Bristol Water merger with Southwest Water. It expects to achieve synergies of £20 million per annum across the Group by 2024-25.
• Share Buy-Back: The Group has delivered £200 million of the share buy-back programme and will review further based on growth opportunities.
• Technical Indicator: The 20-day moving average of the stock has stabilised after a recent downtrend and the recent trend has been upwards.  

Key Risks

• Regulatory Risks: The Group’s operations are prone to regulatory risks and measures that can have an impact on the firm’s performance.
• Capital Risk: The company’s gross debt is linked to index and an 1% increase in inflation might result in an additional £8 million of financing costs.  

Financial Highlights (for half-year ended 30 September 2021, as of 30 November 2021)

(Source: Company Website)

• Uptick in Revenue: The Group posted an increase of 21.8% in revenue to £389.3 million in H1FY22, compared to £319.7 million in H1FY21.
• Rise in Operating Profit: The company delivered growth of 11% in operating profit to £127.4 million in H1FY22, compared to the prior corresponding period.    

One Year Share Price Chart

(Source: REFINITIV; Analysis done by Kalkine Group)

Valuation Methodology: Price/Cash Flow Approach (FY23E)

Conclusion

The company continues to scout for value opportunities in the water resources space as it approaches the summer period.

The stock made a 52-week high and low of GBX 1,335.00 and GBX 983.50, respectively.

Based on the positive trading update, decent performance in H1FY22 and support from the valuation as done using the above method, we have given a “Buy” recommendation on Pennon Group PLC at the current market price of GBX 1,031.00 (as of 20 April 2022, 11:20 AM GMT+1) with lower double-digit upside potential based on 9.82x Price/NTM Cash Flow (approx.) on FY23E cash flow per share (approx.).

Please note markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

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.

Note 5: ‘Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.’

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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