Pennon loss affects share price performance

Pennon’s share price fell by 7% in the week that management announced loss-making full-year results. The group announced a loss before tax of £35.1m, compared to a profit of £16.8m in the prior year. Higher inflationary costs, depreciation and finance charges from accelerating investment exceeded allowed revenues which were depressed by lower customer consumption. At South West Water, operating costs increased year-on-year by £31.8m compared to revenue growth of only £7.9m so, together with increased depreciation, operating profit decreased by 17.5%.  Future revenue recovery will be protected under regulatory mechanisms. There were Group non-underlying costs of £32.4m following the Brixham water quality event (£21m) and the costs of restructuring to reshape the Group’s activities (£16.6m). Group adjusted Earnings Per Share was a loss of 10.3p compared to a positive 5.1p in the prior year. A rebased dividend per share of 31.57p, up 3.4%, was announced in line with Group policy.

Following the Rights Issue in February 2025, £330m of equity was passed down to South West Water and £50m of equity was injected into SES Water to ensure appropriate gearing in each water business. Water Group gearing is now 61.8%. The Return on Regulated Equity (RORE) for South West Water was 10.4%.

South West Water has been investing to increase its water resilience in Devon and Cornwall. Despite the dry start to the year, management is not predicting any water restrictions this summer. Operationally, however, it is still struggling to manage pollution incidents. The level of incidents has not reduced and the number of more serious incidents in 2024 rose from two to four. It retains its 2* Environmental Performance Assessment rating but needs to reduce the number of watercourse pollutions. Management said it has plans in place to achieve a 4* rating in line with its listed peers but will not achieve this until the 2028 assessment, having struggled to achieve it in AMP7.

More positively, South West Water was one of only five companies to reduce spills in 2024. Management was keen to set out the achievement of the Group over AMP7. The number of homes and businesses impacted by internal sewer flooding since 2020 reduced by 68%; external sewer flooding fell by 24%; and leakage by 13% in South West Water, 1% in Bristol and 19% in SES. 

Chief executive Susan Davy summarised AMP7 as “useful and challenging” having given management a much better understanding of its water and waste water assets.

For the current year, management expected outperformance to be focused on financing and cost efficiencies, with a target to achieve a neutral Outcome Delivery Incentive position in terms of financial reward or penalty. Its guidance indicated a return to profitability from increased revenues and a reset lower cost base. Management targeted a RORE over AMP8 of 7% which it said will be delivered through totex and financing efficiencies, coupled with strong operational performance.

Management was asked about further mergers and acquisitions, having delivered financing and operational efficiencies from buying Bournemouth, Bristol and SES Water. Although the Board was not seeking further acquisitions, Davy said Pennon would look at any opportunities as they arise.