Pennon Group PLC (LSE: PNN)

Pennon Group PLC (LSE: PNN) is an FTSE 250 listed UK-based company that specializes in environmental infrastructure and customer services. It operates primarily through two main subsidiaries: Southwest Water Limited, which delivers water and wastewater services in Devon, Cornwall, and areas of Dorset and Somerset, as well as water-only services in parts of Dorset, Hampshire, Wiltshire, and Bristol. This Report covers the Key Recommendation Rationale, Conclusion, and Recommendation on the stock.

Key Recommendation Rationale – Sell at GBX 473.60

• Profitability Impacted Despite Higher Revenue - While underlying revenue increased to £1,047.8 million from £907.8 million in the prior year, the Group reported a statutory loss before tax of £72.7 million in FY25, a notable decline compared to the £9.1 million loss in 2023/24. This outcome suggests that rising costs, including higher finance charges and restructuring expenses, have more than offset the benefits of increased revenue. The profitability pressure may signal that the current phase of high capital expenditure and operational transformation is yet to yield net financial gains.
• Dividend Reduction Reflects Earnings Pressure - The Group reduced its dividend per share to 31.57 pence in FY25 from 36.67 pence in the previous year, despite maintaining an inflation-linked dividend policy. This adjustment may reflect the strain on earnings, as both adjusted and basic earnings per share turned negative. While the decision may support long-term financial stability, it could be viewed as a short-term drawback for income-focused investors.
• Operational Costs and External Events Affect Financial Performance - Significant non-underlying costs, including around £21 million associated with addressing the Brixham water quality issue and approximately £16.6 million linked to restructuring efforts, contributed to the overall statutory loss. These events, though managed proactively, highlight the challenges the Group continues to face in maintaining service resilience while delivering on regulatory and environmental expectations.

Valuation Methodology: Price/ Earnings Approach

Share Price Chart  

 PNN Daily Technical Chart, Source - Refinitiv

Conclusion

PNN is expected to trade at a discount, considering Dividend Reduction Reflects Earnings Pressure, and fears of global slowdown. For conducting the valuation, the following peers have been considered - Severn Trent PLC (LSE: SVT), Drax Group PLC (LSE: DRX) and others.

Given its current trading levels, Profitability Impacted Despite Higher Revenue, recent rally in the share price, relative valuation, and associated risks, it is prudent to exit the stock at the current levels. Hence, a ‘Sell’ recommendation is given on the stock at the current Market Price of GBX 473.60 as of 12 September 2025 at 12:05 PM GMT+1.

Note 1: Past performance is not a reliable indicator of future performance.

Note 2: The reference date for all price data, currency, technical indicators, support, and resistance levels is 12 September 2025. The reference data in this report has been partly sourced from REFINITIV.

Note 3: Investment decisions should be made depending on an individual's appetite for upside potential, risks, holding duration, and any previous holdings. An 'Exit' from the stock can be considered if the Target Price mentioned as per the Valuation and or the technical levels provided has been achieved and is subject to the factors discussed above.

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 scenario.

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.’

Note 6: Dividend Yield may vary as per the stock price movement.