Pennon shares slipped on Tuesday after the water supplier revealed the impact of higher costs after parasites were found in Devon’s water supply and rebased its dividend following a £490m rights issue.
The group swung to a loss despite revenues increasing 15%, as non-underlying costs of £37.6m related to restructuring and the breakout of parasite cryptosporidium in Devon wiped out any profits for the group.
Pennon shares were down 2% at the time of writing.
Although the group recorded a loss in the last year, there are some reasons to be optimistic. The company will benefit from higher water bills that promise to help support Pennon’s ambitious, yet overdue, upgrade of its water systems.
“Pennon managed to keep revenue streaming in last year, with the acquisition of SES Water helping the full-year total float 15% higher to £1.0bn. And with Pennon accepting the regulators’ price review, customers’ bills look set to continue growing. Markets are currently forecasting this year’s total to buoy to a new high-water mark of £1.2bn, up a further 14%,” explained Aarin Chiekrie, equity analyst, Hargreaves Lansdown.
“The top line growth should help to fund Pennon’s mammoth investment plans, with the group required to spend £3.2bn fixing and upgrading its water networks over the five years to March 2030. Pennon’s made good early progress in this area, with record levels of capital expenditure last year as public scrutiny on the sector has been mounting due to pollution of rivers and lakes. While it was pleasing to see early progress on this front, with the overall number of pollution incidents falling year on year, the increased investment weighed on profitability last year.”
Water companies aren’t the most exciting companies at the best of times, and the increased regulatory pressures and requirements to upgrade the systems make the sector just a little less attractive.
In addition, Pennon has created problems for itself with the parasite problem, and analysts highlight the difficulties the group is having shaking this off.
“The Brixham water incident, which involved parasites being found in the Devon water supply have hit the firm reputationally and may well still see further repercussions down the line as a result. Add to that a dividend cut and the investment case sees more risks appearing for less reward. High debt, regulatory scrutiny, and reduced income will temper enthusiasm, and this is evident when looking at the trajectory of shares,” said Adam Vettese, market analyst at eToro.
Pennon cut its dividend to 31.57p from 36.67p during the year due to a rebase of the payout following a rights issue.