Pennon share price: what to expect from full-year results

Pennon pays a solid dividend and has good growth prospects, while the price has recovered from the 2018 lows. But the prospect of nationalisation under a Labour government hangs over it.

When is Pennon’s earnings date?

Pennon reports earnings for the financial year on 30 May 2019.

Pennon’s results preview: what does the City expect?

Pennon is expected to report earnings per share of 54.7p, up 6.6% from a year earlier, while revenue is forecast to be £1.42 billion, 1.9% higher compared to a year earlier. The firm has beaten estimates in all eight of the last eight updates, but only on revenues in five of the past eight. Earnings have been steadily rising since 2016.

UK utilities have been driven lower of late as fears rise that a Labour government will nationalise these firms. A government led by Jeremy Corbyn has become an increasingly likely prospect, as the current administration faces the complete defeat of its attempts to pass the Withdrawal Agreement through Parliament. While an outright Labour government still seems likely, current polling suggests the party will control enough seats following a general election to make it a viable contender in a coalition with the third largest party, the SNP.

Corbyn’s Labour have repeatedly trumpeted their view that it is time to reverse the reforms of the 1980s and 1990s and bring the utilities, as well as rail, back into public ownership. This would involve buying out shareholders, which is expected to cost billions. Under the current Fixed Term Parliaments Act, another general election is not expected until 2022, since the 2017 Parliament still has around three years to run. But it is possible that a change of leadership in the ruling Conservative party would see Boris Johnson, or another politician committed to a ‘hard Brexit’, take power.

It is doubtful whether an election will take place soon, given how unfavourable the polls are for the Conservative party, but it cannot be ruled out, and thus the risk of nationalisation for Pennon and others remains in place.

A recent set of draft regulations for water firms, set out by the Water Services Regulation Authority (Ofwat), suggests that water companies will have to be more conservative in their pricing for the 2020-2025 period. This part of the business may well remain under pressure.

However, there is another part of the business, which appears to be doing better. The waste management business Viridor saw a 23% rise in profits for the first half (H1) of the year, to £78.4 million, and an increase in its energy recovery facilities, with three out of a planned four now operational, suggest that further improvements may be on the way. Pennon expects capacity to lag behind forecasts in this industry, with a gap of seven million tonnes in capacity expected.

Pennon currently trades at 11.9 times forward earnings, around a five-year low (17.9). Indeed, the valuation has been at least one standard deviation below this mean since the beginning of 2018. However, with so much bad news hanging over the company this valuation appears to be justified.

How to trade Pennon’s full-year results

Pennon’s share price saw a sharp increase in volatility in late 2018, with the 14-day average true range (ATR) rising to 22p. The steady rally from the December lows saw volatility decline overall, with ATR hitting a low of around 12.2p before rebounding towards 14p. The current 14p 14-day ATR suggests a 2% move should be expected on any given day.

The average move on results day is around 1.9%, according to Bloomberg data, the upcoming results day is not expected to be much more volatile than any other day at present. Of 11 analysts covering the stock, two have ‘buy’ recommendations, seven have ‘hold’ ratings and two have ‘sells’. The current median target price of £7.88 is 13.2% above the current share price.

Pennon share price: technical analysis

Pennon’s shares have found the path to further upside blocked at £8.00. A rally to this level in June 2018 and then again in February 2019 encountered resistance. Meanwhile, pullbacks in September and December of last year found support around £6.70. At present, the share price continues to head towards the bottom end of this range, but in due course this may provide a buying opportunity, if support continues to hold.

If this low is breached then the mid-2015 lows around £6.40 come into view, and then below this move back down to the 2018 low at £5.50 is possible. Alternately, a third hold of the £6.70 lows would represent a more bullish development, and after a surge from £5.50 to £7.60 during the opening months of 2018 it is hardly surprising that the shares have entered a sustained consolidation phase.

A close above £8.00 breaks higher from the current trading range and heads to the £8.40 highs of 2016 and 2017.

Pennon’s potential overshadowed

Pennon has a solid dividend of 5.6%, which has remained consistent over the past two years, and is a notable advance on the 3.5% of 2014. But this payout is overshadowed by the possibility of Labour government and nationalisation. Nonetheless, the current push lower could provide a buying opportunity for bulls.

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