Pennon – Dry Weather Restricts Profit Pipeline

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Pennon Group plc (LON:PNN)’s full-year underlying revenue rose 4.1% to £825.0m, reflecting contract wins by Pennon Water Services and a full twelve-month contribution from Bristol Water.

Underlying operating profit fell 35.5% to £153.1m due to higher power and inflation-related costs.

Free cash flow fell from an inflow of £11.9m to an outflow of £205.6m largely because of the higher investment levels made in the year to help boost water supplies, as well as increased interest payments. Net debt rose from £2.7bn to £3.0bn.

Revenue is expected to increase while power costs remain broadly flat in the new year. Overall, Pennon is expecting to see improvements in near-term earnings.

A final dividend of 29.77p per share takes the full-year total to 42.73p, representing a 10.9% increase on the prior year.

The shares were broadly flat following the announcement. 

Pennon’s Earnings

“Despite rising revenues, Pennon saw high power and inflation-related costs erode some of its full-year profits. Pennon provides water and wastewater services to businesses and individuals. In return for providing a reliable and affordable service, the regulator allows Pennon to earn an acceptable financial return. This oversight typically translates to relatively stable and predictable earnings – one of its main attractions.

But cashflows are getting squeezed by higher investment levels as the group aims to shore up its water supplies for the year. Unseasonably dry winter weather means the drought status in southwest England remains in place. As summertime nears, it’s touch-and-go whether reservoir levels will be sufficient to keep customers’ supplies running at full flow. If not, Pennon could find itself in the regulator’s firing line.”

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Article by Aarin Chiekrie, equity analyst at Hargreaves Lansdown