ii view: Pennon returns to profit

First-half results to 30 September

• Revenue up 25% to £658 million
• Pre-tax profit of £65.9 million, up from a loss of £18.6 million
• Adjusted profit (EBITDA) up 55% to £254 million
• Interim dividend of 9.26p per share
• Net debt of £4.3 billion, up from £4.1 billion in late March

Guidance:

• Continues to expect adjusted profits for the full year to rise by 60% 

Chief executive Susan Davy said:

“As the only water company to have received three successive outstanding business plan ratings, we understand what we do each day really matters. That's why my brilliant colleagues are firmly focused on ensuring we deliver on our five-year plan for the communities we serve, the places they call home, recognising there is always more to do."

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ii round-up:

Pennon Group (LSE:PNN) today reported a return to profit, with the owner of South West Water focused on pushing its biggest ever investment programme over the current five-year regulatory period to 2030.

A pre-tax profit of £65.9 million for the first half to late September compared with a loss of £18.6 million a year ago when costs to resolve a major water infection incident impacted. Adjusted profit (EBITDA) of £254 million was up 55%, helped by bill increases and a one quarter jump in revenues. 

An interim dividend payment of £43.7 million is up from last year’s £42 million, although the 9.26p per share, payable to eligible shareholders on 3 April, is down from last year’s 12.14p, and is now spread over more shares following a rights issue.

Shares in the FTSE 250 water company rose 2% in UK trading having come into these latest results up by just over a tenth so far in 2025. That’s similar to rivals Severn Trent (LSE:SVT) and United Utilities Group Class A (LSE:UU.). The FTSE 250 index is up by 6% year-to-date. 

Pennon provides clean water to around 3.5 million people. Chief executive Susan Davy is soon to retire with Keith Haslett, current head of Affinity Water, set to join in 2026.  

Investment of £305 million helped a halving in pollution incidents during the half year period. Planned investment of £3.2 billion over the five-year regulatory period to 2030, known as K8, is up from £1.9 billion during the previous K7 period.

Pennon continues to expect adjusted profits (EBITDA) for the current full year to rise by 60%, aided by a potential £200 million of additional revenues from and up from last year’s £1.05 billion. 

Broker UBS reiterated its ‘buy’ stance on the shares post the results, flagging a target price of 630p per share. 

A further trading update is expected for March with full-year results due on 2 June. 

ii view:

Pennon Group came to the UK stock market in 1989 as South West Water. It later combined with Bournemouth Water becoming Pennon Group. Later acquisitions of Sutton and East Surrey (SES) water and Bristol Water have also been made as well as a sale of its waste management business Viridor

For investors, possible new regulator plans following an investigation by the Environment Agency could yet impact financial performance. The water industry’s accountability and impact on the environment cannot be overlooked. Operational issues such as the Devon water parasite incident in 2024 have led to fines and additional costs, while net debt of £4.3 billion compares to a stock market value of £2.6 billion. 

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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. Record investment is now being made improving operational efficiency. A series of acquisitions have offered cost savings opportunities, while management continues to target the retaining of a Baa1 credit rating over the K8 regulatory period. 

On balance, and while heightened regulatory scrutiny is not to be ignored, a forecast dividend yield of over 5.5% should be attractive to income investors.  

Positives:

• Attractive dividend (not guaranteed)
• Cost savings made from acquisitions

Negatives:

• The weather can impact performance
• Elevated net debt

The average rating of stock market analysts:

Buy