ii view: Pennon buys Bristol Water

Viridor sale proceeds are both funding an acquisition and being returned to shareholders.

Full year result to 31 March

• Revenue up 2% to £645 million
• Adjusted earnings down 8.4% to £335 million
• Final dividend of 14.97p per existing share
• Total ordinary dividend for the year of 21.74p per existing share
• Special dividend of 355p per existing share
• Acquisition of Bristol Water for £425 million
• Proposed share consolidation of 2 new ordinary shares for every 3 held

Chief executive Susan Davy said:

“This has been a pivotal year for the Group as we have repositioned Pennon to focus on driving sustainable growth in the UK water sector, building stability for the longer term, and recognising ongoing shareholder loyalty.

“One of my main priorities as the new CEO has been to focus everyone on transforming Pennon to be the best place to work, supporting one another and our communities through the pandemic. 

"We have ensured Pennon is well positioned for the future, reinvesting for growth, and retaining sufficient funds to drive further value.  The acquisition of Bristol Water announced today, is the next step in the growth of the Group, building on significant experience as a leader and consolidator in the industry.”

ii round-up:

Water company Pennon Group (LSE:PNN) today announced both the acquisition of Bristol Water and the return of funds to shareholders, as it puts to work cash received from the sale of waste management business Viridor.

Geographical fit Bristol Water is being purchased for £425 million, while Pennon shareholders will receive £1.5 billion as a special dividend and up to £400 million in the form of share buybacks. The ordinary dividend is also being increased by 9% due to the addition of Bristol Water. A share consolidation of two new ordinary shares for every three currently held is also proposed because of the return of funds to shareholders. 

Pennon shares rose by more than 1.5% in UK trading, leaving them up by more than 10% since pandemic lows in March 2020. That compares to a gain of just under 15% for the FTSE All-Share index. 

In line with its regulatory policy of inflation - Consumer Prices Index including owner occupiers' housing costs (CPIH) - plus 2%, a final dividend of 14.97p per share is declared, making for a total ordinary dividend over the full-year of 21.74p per share, an increase of 3%. 

Adjusted earnings of £335 million were 8.4% lower year-over-year following its adjusted K7 regulatory policy on customer bills and the impact of reduced business demand under Covid lockdowns. 

The purchase of Bristol Water brings 1.2 million customers to Pennon. It will now serve a total of 3.5 million. Pennon’s Annual General Meeting is scheduled for 22 July.   

ii view:

Founded in 1989, the previously merged water companies of South West and Bournemouth Water are now being expanded with the addition of Bristol Water. As well as serving customers across Cornwall, Devon and parts of Dorset, Hampshire, Wiltshire and Somerset, the City of Bristol will now expand its footprint. 

For investors, waste management business Viridor gave Pennon opportunity for growth outside of its regulated water business, and its sale removed a key growth driver. However, proceeds from the sale are being used for multiple purposes, including reducing debt and increasing pension contributions. Now, some of the proceeds are to be returned to shareholders via a special dividend and a share buyback scheme, along with expanding its core water business through an earnings accretive purchase of Bristol Water. A total ordinary dividend for the year of 21.74p leaves the shares sat on a historic yield of around 2%, not derisory in an era of ultra-low interest rates. In all, with strengthened finances and an expanded but focused business offering, Pennon appears to remain deserving of long-term shareholder support. 

Positives:

• Reliable dividend income
• Likely cost savings from Bristol Water acquisition

Negatives:

• Growth opportunities via waste management business now removed
• The weather can impact performance

The average rating of stock market analysts:

Buy