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.

Key Dates: The ordinary shares went ex-dividend on 27 January 2022, while the interim dividend will be paid on 5 April 2022. On 1 April 2022, it is expected to release a trading statement.

Investment Rationale – BUY at GBX 1,026.00

• Merger Clearance: On 7 March 2022, The CMA approved the Bristol Water merger with Southwest Water, which shall help in delivering efficient services and meaningful benefits for all stakeholders.
• Dividend Growth: Following the top-line and bottom-line growth in H1 FY22, interim dividend per share increased by 4.9% year-on-year to 11.70 pence in H1 FY22.
• Capital Distribution: Pennon has paid £1.5 billion as a special dividend, while it has completed the share consolidation. The share buyback of circa £400 million is still underway.
• Technical Indicator: From a technical standpoint, the momentum oscillator 14-day RSI (~47.56) is still close to the oversold zone, while the stock price is hovering around the lower Bollinger Band.
• Undervalued Multiples: On a forward 12-month basis – EV/Sales, EV/EBITDA, Price/Book, and Price/Cash Flow are undervalued against the average of the Utility sector.

Risk Assessments

• Subdued Macroeconomic Conditions: The dented risk appetite of investors amid the Ukraine war crisis, expectations for further interest rates hikes, and uncertain demand outlook.
• Business Risk: The revenues generated by recycling and energy businesses can be affected by a decrease in the power prices and reduced global demand for recycled commodities.

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

(Source: Company Website)

• Resilient Performance: Pennon’s financial performance in H1 FY22 remained in line with management expectations, and it witnessed record levels of demand for water.
• Carbon Emission: It launched an ambition of net-zero 2030 plan in July 2021.
• Acquisition: It is progressing well with the acquisition of Bristol Water, which shall contribute £7.2 million in profit.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative)

*Peers: United Utilities Group PLC, Severn Trent PLC, and ContourGlobal PLC.

*All selected peers are LSE-listed Companies from the Utility sector.  

Conclusion 

Pennon Group PLC has a sector-leading dividend policy, supported by the strong financial and operational performance, discipline management of net proceeds from Viridor’s disposal and robust cash resources. Therefore, it is well-positioned to generate incremental value for its shareholders.

Based on the revenue growth, solid growth in customer base, expected profit before tax, long-term market opportunity, and favorable valuation conducted above, we have given a “BUY” stance on Pennon Group PLC at the current market price of GBX 1,026.00 (as on 15 March 2022, at 12:06 PM GMT), with lower double-digit upside potential based on 23.79x Price/NTM Earnings (approx.) on FY22E earnings 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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