Stock of the day 25/11/2015 – Pennon Group PLC

Will Pennon Group serve up a load of rubbish when it announces its first half results on Friday?

After surging to all-time highs at the end of last year, 2015 hasn’t been quite as successful for the water utility and waste management company. Opening at £9.24 Pennon first hit real trouble as January turned into February, where the stock abruptly fell 70p over 11 days. A recovery to £8.70 by the end of the month was short lived, and by mid-March Pennon was barely holding its head above the £8 mark.

Things did begin to turn around as March came to a close with the appointment of Anglo-American chairman John Parker appearing to buoy investors, before a decent trading statement ensured Pennon approached £8.70 across April, the added bonus of a Tory election victory at the start of May then helping the stock hit a 3 month high of £8.96. However, the stock soon came undone with its full year 2014/15 results.


(Source: IT-Finance.com 25/11/2015)

Despite a 1.6% increase in pre-tax profit to £210.7 million alongside a 0.9% rise in EBITDA to £411 million, investors quickly abandoned Pennon in the aftermath of its full year report. They made have been concerned with a few ugly nuggets tucked away under the headline figures; for example, Viridor, its waste management arm, saw a £30 million drop in recycling revenue year-on-year whilst South West Water, ostensibly its main asset, saw a £4.8 million revenue hit as customers switched from unmeasured to metered water charges.

As the summer continued Pennon’s fall only accelerated, hitting £8.10 by the start of August. It then couldn’t escape the market-wide losses of that month, with a series of sharp losses culminating in a 2015, and 18 month, low of £7.10 on September 23rd. However, an updated at the end of that month, which saw Pennon confirm it was trading in line with expectations and, more importantly, reaffirm it was on track to expand its dividend by 4% plus RPI inflation saw a robust recovery across October. Struggles at the start of November were soon overcome, and it now sits at a current trading price of £8.26 (IT-Finance.com, 25/11/2015), after hitting a 5 month high of £8.39 last week.

In terms of the company’s half year results on Friday, analysts are expecting revenue of £735 million (up from £664 million in H2 2014/15) alongside adjusted net income of £80 million.

Pennon Group has a consensus rating of ‘Hold’ with an average target price of £8.42.