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Over the previous 5 years the Pennon Group (LSE: PNN) share value has fallen 60%. At the moment, (3 June) the corporate reported a pre-tax loss for FY25. However in instances of misery, alternative for sensible buyers can typically seem. So, is that this the case right here?
Loss-making
Decrease water demand coupled with a report funding programme of £650m resulted in an underlying lack of £35m. After tax is accounted for, the loss was £57m. Like lots of its friends, it’s scuffling with a bloated stability sheet that has seen curiosity expense improve 23% in 2025.
There are not any indicators that South West Water, its most important buying and selling identify, is in as dire a monetary strait as, as an example, Thames Water. However a spate of latest unfavorable headlines has undoubtedly been a serious contributing issue within the inventory’s decline.
Chief amongst them was the Brixham water incident final 12 months. An outbreak of the parasite cryptosporidium resulted in residents being left with no water. It confronted heavy criticism each for its sluggish response and lack of communication with residents affected.
Enhanced buyer compensation along with the availability of bottled water over an eight-week interval, price it £21m. However the reputational injury was arguably much more vital.
Authorities overview
Its attention-grabbing that on the day of its outcomes the federal government revealed an interim report into the state of the water business. It lays naked what has been identified for a while: public confidence within the business is at report lows.
The ultimate report is due out in the summertime, however my sense is that the times of bumper dividend payouts is over for a while.
Certainly, we’ve got already seen this occurring with Pennon. A rights concern again in February elevated web debt to £4bn and diluted present shareholders. Because of this the dividend was re-baselined 14% decrease. Nevertheless, the dividend yield nonetheless sits at a wholesome 6.4%. Yearly will increase will likely be linked to the patron value index.
Monopoly
Considered one of motive for investing in water corporations is income stability. As a monopoly enterprise, Pennon negotiates with the regulator each 5 years on how a lot it may possibly cost. The following management interval runs from 2025-2030.
Ofwat has already introduced vital value will increase. Because of this, in FY26, Pennon now expects earnings earlier than revenue tax, depreciation and amortisation (EBITDA) to extend by 66%. In return for value will increase, infrastructure spend will improve.
Analyzing the chief abstract of the Impartial Water Fee’s report a variety of headlines grabbed my consideration.
Firstly, it’s not recommending the top of privatisation. The fee to the taxpayer will merely be too nice. Secondly, it closely criticises using five-yearly opinions, which it claims has resulted within the setting of short-term targets throughout the business.
The whole business now stands at a crossroads. The spike in payments at a time of a price of dwelling disaster, air pollution incidents and lack of infrastructure spend is forcing authorities to behave. The predictability of future revenues is one key motive to speculate. However ought to an consequence of the ultimate report be that a lot longer-term cycles are wanted, that might upend the whole funding thesis for a lot of income-chasing buyers.
With near-term uncertainty so nice, I received’t be contemplating investing any time quickly.
| CoinFN
