ii view: Pennon optimistic under new CEO

Full-year results to 31 March

• Revenue up 23% to £1.29 billion
• Adjusted profit (EBITDA) up 55% to £519 million
• Pre-tax profit of £114 million, up from the prior year’s loss of £73 million
• Final dividend of 20.03p per share
• Total annual dividend payment of £138.2 million, up from last year’s £133.7 million
• Net debt of £4.51 billion, up from £4.1 billion a year ago

Chief executive Keith Haslett said:

"I am delighted to have started my tenure as chief executive at Pennon at what is an important moment both for the Group and for the wider UK water sector.

“As Pennon enters a new era under my leadership, it does so on the back of a return to profitability and the mobilisation of our AMP8 investment plan. However, it is clear that there is more work to do, and improving operational discipline and capital delivery will be important to meet the commitments we have made and the standards we aspire to achieve in the future.”

• Our Services: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

ii round-up:

Under new CEO Keith Haslett, Pennon Group (LSE:PNN) today reported annual profits that matched City forecasts, although the Southwest water company expects another financial penalty from the regulatory in the year ahead.

Industry price rises and heavy cost management helped adjusted profit (EBITDA) rise 55% to £519 million. A total annual dividend payment of £138.2 million is up from last year’s £133.7 million and generates a final dividend of 20.03p per share, which is payable to eligible shareholders on 4 September.

Pennon shares fell 3% in UK trading having come into these latest results down by a similar amount year-to-date. Fellow water companies United Utilities Group  Class A (LSE:UU.) and Severn Trent (LSE:SVT) are up by around 6% so far in 2026. The FTSE All index has risen by around 2%.

Pennon provides clean water to a population of around 3.5 million people. Heavy rainfall weighing on performance targets led to an Outcome Delivery Incentive (ODI) penalty of £42 million over this latest financial year.

ODI’s are paid to or taken from water companies by the regulator depending on the performance of criteria such as reducing leakage or environmental pollution. Heavy rainfall caused sewage to flood into clean water during the year.

Pennon’s record investment programme of £3.2 billion over the current regulatory period to 2030 is aimed at improving operational efficiency. However, operational performance for the year to 31 March 2027 is still expected by management to result in an ODI penalty.

Group net debt of £4.51 billion as of late March compares with £4.1 billion a year ago. Keith Haslett, who took charge in early April,  is now working to provide a strategic update before the end of September.

Pre-tax profit of £114 million for this latest financial year compares with a loss of £73 million the year before. The loss was largely caused by costs required to make good a Devon water parasite incident.

Broker Morgan Stanley reiterated its overweight stance on Pennon shares post the news, highlighting a target price of 680p per share.  

First-half results are scheduled for 1 December.

ii view:

Floating on the UK stock market as Southwest Water in 1989, the group later combined with Bournemouth Water to become Pennon Group. Subsequent acquisitions of Sutton and East Surrey (SES) water and Bristol Water have also been made, as well as the sale of waste management business Viridor.

For investors, regulatory reforms driven by the current UK government now place a greater emphasis on transparency, accountability and long-term investment. The water industry’s responsibility for and impact on the environment can never be forgotten. Operational challenges such as the Devon water parasite incident in 2024 led to fines and additional costs, while group net debt of £4.51 billion as of late March compares to a current stock market value of £2.33 billion.

• Why Tesco and Sainsbury’s shares now offer ‘good entry point’
• Aviva shares tipped to boom and dividend grow
• ii view: can Vodafone shares continue rebound?

On the upside, the relative defensiveness of a utility operator, given that we all need water no matter what the health of the economy, offers appeal and backing to dividend payments. The new CEO is now looking to rejuvenate group strategy, with a review and outcome findings due before the of September. Record investment is being made in improving operational efficiency, while a series of acquisitions have offered cost savings opportunities.

In all, and while increased regulatory scrutiny is not to be forgotten, a forecast dividend yield of close to 6% should keep income investors happy.

Positives:

• Attractive dividend (not guaranteed)
• New CEO to provide a strategic update

Negatives:

• The weather can impact performance
• Elevated net debt

The average rating of stock market analysts:

Buy