Pennon plans to raise around £490mn of cash by issuing new equity shares through a rights issue.
Investors will be able to buy 13 new shares for every 20 they already own, at a price of 264p per share. This represents a discount of 35.2% a third based on the closing price on 28 January 2025.
The proceeds will be used to fund the required infrastructure investment over the next 5 years to March 2030. The group plans to spend £3.2bn upgrading its infrastructure over this period, while also maintaining debt levels within their target range.
The dividend is being rebased, with total dividend payments expected to match last year’s £129.3mn, before increasing in line with inflation through to 2030. However, due to the increased share count resulting from the rights issue, the per-share dividend will decline.
The shares rose by 5.0% mid-morning.
Our view
Pennon’s accepted the regulator’s price review, which will see customers’ bills rise by 23% in the five years to March 2030. In return for the increased allowed revenue, Pennon will have to spend £3.2bn upgrading its water network over the same period.
To help fund this, Pennon’s raising £490mn by issuing new equity and lowering per-share dividend payments. Markets reacted positively to the news, and the valuation moved higher on the day.
Back to everyday business, in return for providing reliable water and wastewater services, the regulator allows Pennon to earn an acceptable financial return.
Pennon’s like-for-like revenue was flat over the first half, as inflation-linked tariff increases were offset by customers' more conservative water usage. But as long as Pennon keeps delivering its contracted level of service, it should be able to recover this shortfall in future periods.
It's important to remember that Pennon's revenue and earnings power are linked to both inflation and its asset base, measured by Regulatory Capital Value (RCV). That provides Pennon with incentives to invest in its assets (which helps to deliver a good service to customers), as well as operate efficiently (which helps increase company earnings).
Pennon remains focused on improving and expanding its infrastructure. The upcoming rights issue should provide the cash inflows to keep this going while keeping debt levels in check. In the long run, these infrastructure projects are expected to be a net benefit. The acquisition of SES Water also helped boost RCV growth, which should further lift revenue in the years to come.
Another thing to bear in mind is the regulatory pressure that's been mounting against water utility companies. South West Water, which is owned by Pennon, has been on the receiving end of fines for discharging untreated sewage into rivers and lakes. Until these issues are firmly in the past, investor sentiment around water companies is likely to be muted, putting downward pressure on valuations.
Despite the challenges, we think Pennon looks well-placed to benefit if it can execute its long-term strategy. Regulatory pressure and some high-profile slip-ups mean it currently trades at a discount to its peer group, which we see as an opportunity. But it can take time for investor attitudes to change, and nothing is guaranteed.
Environmental, social and governance (ESG) risk
The utilities industry is high-risk in terms of ESG. Management of these risks tends to be strong, with European firms outperforming their overseas counterparts. Environmental risks like carbon emissions, resource use and non-carbon emissions and spills tend to be the most significant risks for this industry. Employee health and safety and community relations are also key risks to monitor.
According to Sustainalytics, Pennon’s management of ESG risk is strong.
It has a very strong health and safety programme, with zero fatalities among its employees and contractors over the last three years. However, Pennon has been fined for numerous unpermitted wastewater releases in recent years and has been heavily criticised by the regulator.
Pennon key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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