Pennon revenue rises, profit slides in first half

(Sharecast News) - Water utility Pennon Group reported a 5.4% increase in first-half underlying revenue on Wednesday, to £448.6m, driven by inflationary tariff adjustments moderated by regulatory measures to minimise the impact on customer bills.

The FTSE 250 company said Pennon Water Services saw ongoing revenue growth from contract wins outside its wholesale supply regions.

Despite the revenue gains, the company reported a 59.6% fall in underlying profit before tax to £9.1m, thanks to higher inflation-driven costs.

However, compared to the second half of the prior financial year, Pennon recorded an improvement in underlying profit before tax, which was expected to continue into the second half.

The company reported net non-underlying cost items before tax of £5.9m, widening from £1.6m year-on-year and including one-off costs related to business transformation, drought, and renewable energy acquisitions.

Its statutory profit after tax fell to £1.8m from £18.5m year-on-year.

Adjusted earnings per share declined to 3.6p from 7.9p in the prior year's first half, while statutory earnings per share were 0.5p after accounting for net non-underlying costs.

Pennon Group said it was committed to its established K7 dividend policy, with an 8.3% increase in the interim dividend per share to 14.04 pence.

In terms of investment and growth, the company said it was on track to achieve its organic and acquisitive growth strategy, with a 60% regulated capital value growth target by 2025 and approximately 100% by 2030.

Pennon had committed £1.6bn in investments in the K7 2020-2025 regulatory period, with a significant portion dedicated to sustainable environmental improvements within its region.

Regulated water business capital investment alone had increased 65% compared to the first half of the 2023 financial year, totalling £234m.

The company said it had also realised benefits from the Bristol Water acquisition, with £16m in annualised synergies.

Pennon said it also accelerated its commitment to net zero 2030 by investing in renewable energy generation and promoting nature-based solutions.

It said it had unlocked more than £90m of customer support in K7 to keep bills as low as possible with below-inflation increases through 2025.

Pennon said it maintained a strong balance sheet with responsible, sustainable gearing at 61%, broadly in line with Ofwat'sOfwat's expectations.

The company noted its track record of robust returns, with a cumulative K7 group return on regulated equity of 7.9%.

Looking ahead to its K8 plan for 2025-2030, Pennon said it had received strong support from customers, with 74% customer acceptability following engagement.

The plan would involve £4.5bn in total expenditure, assuming 12% efficiency, to benefit customers, communities, and the environment.

Bills would increase by an average of 3% to 4% annually to 2030 across Pennon's regions, with the potential for up to 8.6% return on regulated equity.

Underpinning the plans was financing, with an average gearing of 63.3% over K8 within its established range of 55% to 65%.

The firm also anticipated nominal regulated capital value growth of 38% by 2030.

"Pennon has continued to make progress in the last six months on delivering for customers and shareholders, improving operational resilience across the group through an 87% step up in investment, supported by a healthy balance sheet," said chief executive officer Susan Davy.

"We are executing on our twin-track strategy of organic and acquisitive growth in UK water, creating long-term value and making progress on what matters most to those across our regions.

"I am very clear that if we serve our customers well, we serve our shareholders well, which is why we are focused on improving environmental performance, keeping bills as low as possible, developing new water resources, and investing in renewable energy generation."

That, Davy said, had helped the firm deliver a 100% bathing water quality assessment for the third year running and reduce serious pollution incidents this year, but it had more to do.

"Our twin-track strategy of both organic and acquisitive growth in UK water ensures we continue to drive long-term value, with the Bristol acquisition benefits on track, alongside a growing portfolio of complementary services delivered through our business to business retailers and growing renewable energy business."

At 0814 GMT, shares in Pennon Group were down 0.54% at 742.5p.

Reporting by Josh White for Sharecast.com.