ii view: Pennon reviewing strategy

Water & waste management group Pennon reports in line trading with a strategy review now being launched.

Trading update to 30 September 2019 - ahead of half-year results

• On track to meet full-year management expectations
• Reviewing strategic focus, growth options and capital allocation policy

ii round-up:

Pennon (LSE:PNN) owns the former South West and Bournemouth Water companies and provides water and wastewater services to around 1.7 million people. It also owns waste management business Viridor, which recycles rubbish produced by local authorities and businesses. 

Pennon's Energy Recovery Facilities (ERF) business burns non-recyclable waste to generate electricity. 

Trading for the first-half had proved in line with management's expectations with the board now considering the time as right to conduct a full review of the company's strategic focus, growth options and capital allocation policy.

The imminent start of the new regulatory delivery period (K7) for South West Water and growth opportunities for Viridor, coupled with recent strong trading for both businesses now underpinned the timing of the review. 

South West Water remained on track to deliver continued outperformance of its K6  (2015-2020) regulatory targets, while Viridor's ten operating Energy Recovery Facilities (ERFs) were performing well with construction at its previously announced £65 million plastics reprocessing facility now underway. 

The share price was little changed in early morning post-update trading. 

ii view:

Water companies are generally considered by investors to be defensive in nature. Demand for water changes little no matter what the economic backdrop. Furthermore, reliable customer income also makes for dependable dividends. 

Differentiating it from rivals such as United Utilities (LSE:UU.), Pennon also operates an unregulated waste management business Viridor. News of Pennon management's full review we believe raises speculation that the two businesses could be separated, particularly ahead of a potential switch to a Labour government and their possible plan to renationalise utility companies at unknown prices. 

For investors, a prospective dividend yield of over 5% (not guaranteed) still offers attraction, but political risks and uncertainty have clearly increased, factors which investors now need to consider. 

Positives:

• Attractive dividend yield (not guaranteed)
• Unlike rivals, Pennon can generate additional growth from its unregulated waste management business
• Growing public awareness of plastics pollution is good for the Viridor recycling business

Negatives:

• Political uncertainty. The Labour Party says it might renationalise utility companies
• Industry regulation. Terms for the regulatory period 2020-2025 are currently being assessed
• The waste division diversifies risk, but any difficulties will offset profits at the water unit

The average rating of stock market analysts:

Buy