Pennon Group – which way will they turn?

Pennon Group, owner of South West Water today released interim results, along with a strategic update. With the group sat on net cash after its earlier disposal of the group’s Viridor recycling business for over £4bn, investors have been eagerly awaiting this news.

Commenting on Pennon’s announcement, Steve Clayton, fund manager of the HL Select UK Income Shares fund which has a 4% position in Pennon said: “Pennon is performing well against its targets, and looks to be coping well with its new, tougher regulatory price regime. Dividends are more complex. With no income coming from Viridor any longer, the group’s dividend to shareholders represents the payment from South West Water alone. This is increased in line with the group’s policy of growing dividends by CPIH +2% each year. But without the Viridor contribution, the actual cash paid to shareholders falls from 13.66p to 6.77p per share.

“What will Pennon do with the Viridor proceeds? The group are talking about acquisitions in the water sector, and the press have linked Pennon to Southern Water. Pennon aren’t naming targets but highlight that they’ve got £2.7bn of available cash resources to spend.  So potentially, there are big things ahead for Pennon. If they can reinvest that cash through a deal and improve the returns that the target earns up towards Pennon’s own levels, that could be pretty transformational. Alternatively, they could hand some or all of the spare cash back to their investors. For now, investors have to keep waiting to find out which path Pennon will take. Given the uncertainty, Pennon shares were barely changed in early trading this morning.”