ii view: water company Pennon launches £490 million fundraising
29th January 2025 11:27
by Keith Bowman from interactive investor
Acceptance of Ofwat determination and new £490 million fund raising
- Launching a 13 for 20 rights issue at a price of 264p per new share
Chief executive Susan Davy said:
"We have listened to customers, communities, and stakeholders. With these record levels of investment, we will be transforming what we do, fixing storm overflows, building new reservoirs and creating natural habitats for wildlife.
"This is so much more than just about water. It's about much needed regional investment, creating jobs and building homes. At the same time, we will be supporting customers when they need it most, keeping bill increases low, with innovative tariffs and our £200 million support package.”
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ii round-up:
Water company Pennon Group (LSE:PNN) today accepted regulatory proposals for the new five-year period to 2030 as well as launching a new £490 million shareholder fundraising to help bankroll a £3.2 billion investment programme.
The dividend payment will be rebased given the issuance of new shares from an underwritten rights issue, with the payment then linked to inflation going forward.
Shares in the FTSE 250 company fell 3% in early UK trading before rallying 5%, having come into this latest news down around a quarter over the last year. Rivals Severn Trent (LSE:SVT) and United Utilities Group Class A (LSE:UU.) are each down by less than a tenth over that time. The FTSE 250 index itself is up by almost 7%.
Pennon provides clean water to a population of around 3.5 million people across the South West of England. The proposed fundraising will be via a fully underwritten rights issue, offering 13 new shares at a price of 264p each for every 20 existing shares held.
The money raised will help pay for record investment of £3.2 billion over the five-year regulatory period, or AMP8, up from £1.9 billion during AMP7 that ran between 2020 and 2025.
Under a revised dividend policy, the total payout for the 2024 financial year of £129.3 million will be maintained, but adjusted on a dividend per share basis given the issuance of 186 million new rights issue shares. The rebased dividend per share will then be increased by inflation for the current fiscal year to 31 March 2025, although without an additional 2% increase previously applied under the old dividend policy.
With group net debt of £3.8 billion as of 31 March 2024, management is continuing to target retention of a strong investment grade credit rating of Baa1 over the new regulatory period to 2030.
An investor day is scheduled for 13 March.
ii view:
Pennon Group came to the UK stock market in 1989 as South West Water. It later combined with Bournemouth Water becoming Pennon Group. In 2020, it agreed to sell its waste management business Viridor, later returning funds to shareholders. The previous acquisition of SES water added a further 750,000 customers to the 1.2 million it acquired under its 2021 acquisition of Bristol Water.
For investors, a cutting or rebasing of the dividend payment is being made. Previous operational issues subsequently led to fines and additional costs, hindering group performance. The water industry’s accountability and impact on the environment can never be forgotten, while periodic negotiations with regulator Ofwat increase investor uncertainty.
On the upside, acceptance of the regulator’s latest rulings with no planned appeal reduces near-term uncertainty. The relative defensiveness of a utility operator, given that we all need water no matter what the health of the economy, offers appeal and backing to dividend payments. A series of acquisitions have offered cost saving opportunities, while record investment is now being made in improving operational efficiency.
In all, and while unpredictable weather can hinder performance, an ongoing inflation linked dividend payment and forecast yield of over 4.5% are likely to keep investors interested.
Positives:
- Attractive dividend (not guaranteed)
- Targeting cost savings from acquisitions
Negatives:
- The weather can impact performance
- Heightened net debt
The average rating of stock market analysts:
Strong hold
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