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Over the previous 5 years the Pennon Group (LSE: PNN) share value has fallen 60%. Right now, (3 June) the corporate reported a pre-tax loss for FY25. However in instances of misery, alternative for good buyers can generally seem. So, is that this the case right here?
Loss-making
Decrease water demand coupled with a document funding programme of £650m resulted in an underlying lack of £35m. After tax is accounted for, the loss was £57m. Like a lot of its friends, it’s battling a bloated steadiness sheet that has seen curiosity expense enhance 23% in 2025.
There are not any indicators that South West Water, its important buying and selling identify, is in as dire a monetary strait as, as an illustration, Thames Water. However a spate of current destructive headlines has undoubtedly been a significant contributing issue within the inventory’s decline.
Chief amongst them was the Brixham water incident final yr. An outbreak of the parasite cryptosporidium resulted in residents being left with no water. It confronted heavy criticism each for its gradual response and lack of communication with residents affected.
Enhanced buyer compensation along with the supply of bottled water over an eight-week interval, value it £21m. However the reputational harm was arguably way more vital.
Authorities evaluation
Its fascinating that on the day of its outcomes the federal government printed an interim report into the state of the water business. It lays naked what has been recognized for a while: public confidence within the business is at document 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 taking place with Pennon. A rights situation again in February elevated web debt to £4bn and diluted present shareholders. Consequently the dividend was re-baselined 14% decrease. Nonetheless, the dividend yield nonetheless sits at a wholesome 6.4%. Yearly will increase shall be linked to the patron value index.
Monopoly
Considered one of cause 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 might cost. The following management interval runs from 2025-2030.
Ofwat has already introduced vital value will increase. Consequently, 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 enhance.
Analyzing the manager abstract of the Unbiased Water Fee’s report a lot of headlines grabbed my consideration.
Firstly, it’s not recommending the top of privatisation. The price to the taxpayer will merely be too nice. Secondly, it closely criticises the usage of five-yearly evaluations, which it claims has resulted within the setting of short-term targets throughout the business.
Your complete business now stands at a crossroads. The spike in payments at a time of a price of residing disaster, air pollution incidents and lack of infrastructure spend is forcing authorities to behave. The predictability of future revenues is one key cause to take a position. However ought to an consequence of the ultimate report be that a lot longer-term cycles are wanted, that would upend the whole funding thesis for a lot of income-chasing buyers.
With near-term uncertainty so nice, I gained’t be contemplating investing any time quickly.
