25th Nov 2016 15:04
LONDON (Alliance News) - Pennon Group PLC on Friday said it delivered a "good performance" in the first half of its financial year, as South West Water continued to deliver sector-leading returns, helping the water and wastewater company post a 20% lift in profit.
The FTSE 250-listed company said underlying pretax profit in the six months to the end of September totalled GBP128.1 million, while the reported profit that includes exceptional items amounted to GBP102.4 million. They can both be compared to the underlying and reported profit of GBP106.8 million the year before.
Revenue in the first half declined 0.5% year-on-year to GBP685.5 million from GBP689.1 million, but lower operating costs allowed earnings before interest, tax, depreciation and amortisation to rise slightly to GBP234.7 million from GBP231.7 million.
Operating profit increased year-on-year to GBP143.2 million from GBP135.3 million.
Pennon raised its interim dividend by 6.0% to 11.09 pence from the 10.46p paid a year before, and the company said it should deliver dividend growth of 4.0% above RPI inflation over the full year.
"We believe Pennon is well positioned for the future and is on track to meet management expectations for the full year 2016/17," said the company.
South West Water, the division supplying water to its customers, is continuing to deliver "sector-leading" returns on retained earnings at 11.7%, Pennon said, while the waste business Viridor is on track to deliver GBP100.0 million of Ebitda from its energy recovery business, boosted by an improvement in margins.
"South West Water's RORE has been 11.7% since the start of the regulatory period and is expected to continue to be at a sector-leading level through to 2020," the company said.
Revenue from South West Water in the half was up 3.1% to GBP287.9 million, with Ebitda rising 5.4% to GBP183.0 million and operating profit up 8.1% to GBP127.2 million. The division generated an underlying pretax profit of GBP97.0 million, up 12% from GBP87.0 million the year before.
Viridor generated revenue of GBP397.9 million, dipping 3.0% from the prior year, but still delivered a 3.8% lift in Ebitda to GBP63.3 million. Ebitda rose from energy recovery facilities and recyling, but steep drops were experienced within the landfill, landfill gas and from contracts and collection activities. Viridor's underlying pretax profit for the half rose 79% to GBP23.1 million from GBP12.9 million.
Pennon said, as part of its ongoing investment in growth, that it will invest GBP252.0 million to build an energy recovery facility in Avonmouth, bringing the total amount of plants up to 12.
"This is a significant investment in the UK's environmental infrastructure and will add to the already expected significant increase in Ebitda from our energy recovery facilities portfolio once all facilities are fully operational," said Chief Executive Chris Loughlin.
"We expect demand for energy recovery facilities to continue to exceed capacity into the long term. With four energy recovery facilities now under construction or committed we will generate significant growth in Ebitda over the next few years as the plants come on stream," Pennon said.
"In water, we are announcing a new retail venture for business customers with South Staffs/Cambridge Water," Loughlin said Friday.
Pennon Water Services, the separate legal entity operated from Bournemouth providing retail services for the company's existing non-household retail brands, along with South West Water's wholesale operations, successfully entered the shadow market in early October, teaming up with the owner of Staffs and Cambridge Water, South Staffordshire PLC Group.
Industry regulator Ofwat is opening up a new retail market for non-household customers next year and the shadow market is seen as the industry's practice run to test market systems and processes while also testing the readiness of companies from all angles.
"A key part of our non-household strategy has been to retain our existing customer base of 85,000 customers and to capitalise on Viridor's national footprint, its commercial culture, order book, expertise and existing customer relationships," said Pennon.
"Pennon has always recognised the need to achieve scale in order to compete within this market and as a result a new retail non-household venture arrangement with South Staffordshire Group has been agreed, with Pennon retaining an 80% share and the operations being merged in Bournemouth." Pennon added.
The activities will be merged from April 2017 and will benefit from strong customer service and a common platform which will continue to be supported by the South Staffordshire Group.
The combined business will have GBP170.0 million of annual revenue, 8% of the non-household retail market share and is expected to be the fourth largest retailer, according to Pennon.
Larger peers Severn Trent PLC and United Utilities PLC have already formed a similar venture in preparation for the new market. Water Plus will be a 50:50 partnership between the two giants.
Severn Trent has also recently launched a bid to takeover the smallest water company listed in London, Dee Valley Group PLC, which is also the only one to focus solely on supplying water.
Pennon said South West Water delivered GBP80.0 million worth of total expenditure savings since the start of 2015, when the current five-year regulatory period started, while a recent review will also increase total group savings to GBP17.0 million per year from 2019 rather than the previous expectation to save GBP11.0 million annually.
Pennon shares were trading up 1.2% to 820.00 pence per share on Friday afternoon.
By Joshua Warner; [email protected]; @JoshAlliance
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