Pennon Group sees "significant value potential" in UK acquisition and wields a £2.7bn cash pot

Pennon Group has confirmed it is on the hunt for a UK water company with a £2.7bn acquisition pot boosted by a £1.7bn profit from the sale of its Viridor waste management arm earlier this year.

In its half-year report to 30 September 2020 the group said it was “working extensively to narrow down the potential opportunities” for an acquisition. “We believe there is significant value potential for shareholders from the reinvestment of the Viridor sale proceeds in the UK water sector,” it reported.

It added: “any potential opportunity would be driven by our ability to deliver totex outperformance, financial efficiencies, synergies and growth,” and went on to assert that it would eschew acquisition and return capital to shareholders, “If a compelling value creating opportunity is not available.”

Restating its figures to show the performance of the remaining business following the disposal of Viridor, the group reported a 48% year-on-year drop in profit before tax to £61.9m on revenues for the period off 1.9% to £319.7m. The earnings figure did not include profits in the period from discontinued operations. They included £20m returned to customers through the group’s profit sharing initiative, WaterShare.

Pennon’s South West Water subsidiary, showed an 8% fall in profit before tax to £88.5m for the half year compared to the same period last year. That reflects a 3.4% fall in revenue to £282.9m and a 4.4% lift in operating costs to £106.8m.

Revenue was hit by PR19 and the pandemic. The impact of Covid was curtailed by a 5% increase in household consumption over the period but that too was offset by a 25% fall in non-household consumption.

The increase in operating costs was attributed to payroll increases and rising power and treatment costs along with Covid-related costs including personal protection equipment.

The heaviest Covid-related impact on revenue was felt by Pennon’s non-household retina operation Pennon Water Services where revenue for the half year was down 13% to £75.3m offset by a 12.%% falling operating costs. The business made a marginal operating loss down year on year from a £0.6m profit .The loss before tax increased from £0.3m 12 months ago to £0.9m. Pennon Water Services reported revenue gain from some £10.5m-worth of new business compared to the same period last year and stable non-wholesale operating costs.

Net finance costs for the half year for Pennon Group were down 6.5% to £28.1m

The group has continued its dividend commitment and volunteered a robust defence which included its

• “significant” cash and liquidity of some £3.5 billion;

• not having received any government support; and

• having returned £20 million of outperformance with customers under through WaterShare+.

It went on to point out that some 60% of its shareholders were UK-based pension funds, charities, employees, customers and other retail holders who rely on dividend income. And it reported that one in 16 household customers had opted to take Pennon shares through WaterShare+, marking “significant customer ownership.”