ii view: Pennon shares steady following half-year update

First-half trading update to 30 September

• Continues to expect a return to statutory profit from a loss last year of £73 million
• Now expects adjusted profits for the current full-year to rise by 60%, down from a previous 66% increase 

Chief executive Susan Davy said:

"We're driving real improvements for our customers and communities whilst delivering a return to strong profitability. Despite the pressures of a hot summer, we've maintained resilient water supplies and continued to improve services for our customers. Whilst there is more to do, our pollution reduction plans are delivering tangible benefits, halving the number of pollutions and spills from storm overflows, reducing our impact on the environment."

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ii round-up:

Pennon Group (LSE:PNN) today reiterated its expectation for a return to profit over the current financial year to late March, with a loss last year pushed by costs to resolve a major water infection incident. 

Aided by increased revenues and reduced costs, adjusted profits (EBITDA) for the current full year are expected to rise by 60% from last year, although down on management’s previous forecast of 66%, hindered by a burst main at its Dousland water treatment works.

Shares in the FTSE 250 water company initially fell 1% in UK trading, later recovering to a gain of 0.5%, and having come into this latest news down 3% over the last year. That’s similar to rival Severn Trent (LSE:SVT) but in contrast to a 3% gain for the FTSE 250 index itself over that time. 

Pennon provides clean water to a population of around 3.5 million people across the South West of England. The Exeter headquartered company reaffirmed its target to achieve a 7% Return on Retained Earnings (RORE) over the new five-year regulator period to 2030, with the current financial year contributing. 

RORE is a calculation showing how well a company's profits, after dividend payments, are reinvested and is an indicator of growth potential.

Earlier in 2025, the newly established Independent Water Commission (IWC) recommended stronger water industry regulation with investigations into the industry ongoing.

Broker Morgan Stanley reiterated its ‘equal weight’ stance on Pennon shares post the update.    

First-half results are scheduled for 27 November. 

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. A previous acquisition of Sutton and East Surrey (SES) water added a further 750,000 customers to the 1.2 million it acquired under its 2021 acquisition of Bristol Water.  

Investment of £3.2 billion over the current five-year regulatory period, known as K8, includes plans to reduce spills from storm overflows and improve water treatment facilities, and is up from the £1.9 billion made over K7.  

For investors, possible new regulatory 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 during 2024 have led to fines and additional costs, while net debt as of late March 2025 of £4 billion compares to a stock market value of £2.1 billion. 

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More favourably, 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 in 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. 

In all, and while heightened regulatory scrutiny offers increased caution, a forecast dividend yield of over 6% is likely to keep income investors fans interested.

Positives:

• Attractive dividend (not guaranteed)
• Targeting cost savings from acquisitions

Negatives:

• The weather can impact performance
• Elevated net debt

The average rating of stock market analysts:

Buy