Pennon posts £72.7M loss, issues FY25-26 outlook in line with guidance

Pennon Group reported a statutory pre-tax loss of £72.7 million for the year ended March 31, driven by increased capital investment and restructuring costs, including £21 million related to a water quality incident. While group revenue rose 15% to £1,047.8 million, supported by SES Water, South West Water revenue was flat, and adjusted EPS was negative 10.3p. The company declared a dividend of 31.57p per share and expects EBITDA to rise by around two-thirds year over year for fiscal 2025-26, with capital expenditure between £710 million and £740 million.

Analysis

Pennon Group reported a statutory pre-tax loss of £72.7 million for the fiscal year ended March 31, driven by substantial capital investment of £652.5 million and non-underlying costs amounting to £37.6 million, which notably included £21 million for a water quality incident and £15.8 million for restructuring. Despite these financial headwinds, group revenue saw a robust increase of 15% year-over-year to £1,047.8 million, significantly supported by the first full-year contribution from SES Water and a rise in retail revenue to £320.3 million; however, South West Water revenue remained flat at £737.7 million due to reduced demand offsetting higher tariffs. Profitability metrics reflected the pressures, with adjusted earnings per share at a negative 10.3p and EBITDA recorded at £335.6 million, aligning with company guidance but 3% below consensus. The company's net debt increased to £3.9 billion, resulting in water group gearing of 61.8%, and it faced an increased net ODI penalty of £25 million for 2024/25. Operationally, Pennon highlighted a 68% reduction in internal sewer flooding since 2020 and improvements in leakage rates. The board affirmed its commitment to shareholder returns by declaring a dividend of 31.57p per share, representing a 3.4% year-over-year increase consistent with its CPIH-linked policy. Forward guidance for fiscal 2025-26 is optimistic, projecting an approximate two-thirds rise in EBITDA year-over-year and an increase in regulated water revenue by £180 million to £240 million, although depreciation and interest costs are also set to rise. Capital expenditure is planned between £710 million and £740 million for the upcoming period, as the company targets a return on regulated equity of around 7% for AMP8. Jefferies described the update as a "small positive for the company."

Key Decisions for Investors

• Investors should weigh the current statutory losses and increased net debt, stemming from significant capital investments and one-off charges, against the company's 15% group revenue growth and continued commitment to its CPIH-linked dividend policy.
• Careful monitoring of Pennon's execution of its substantial capital expenditure program, guided at £710 million to £740 million for FY25-26, will be crucial, particularly its ability to achieve the targeted ~7% RoRE in AMP8 while managing rising interest costs and improving operational performance to mitigate Outperformance Delivery Incentive (ODI) penalties, which increased to £25 million.
• The strong forward guidance for fiscal 2025-26, including a projected two-thirds increase in EBITDA and a £180 million to £240 million rise in regulated water revenue, presents a potential recovery and growth trajectory that may appeal to investors with a longer-term perspective who can tolerate near-term financial pressures from the ongoing investment cycle.