Will Viridor weigh on Pennon's results?

Pennon Group will report its first-half figures on Friday 28 November; its waste management business is expected to weigh on the group’s figures.

A recycling plant
Source: Bloomberg

Pennon’s share price hit an all-time this month despite the waste management division dragging on the overall group. Full-year profits rose by 9%, and taking a closer look at the figures reveals that South West Water, which accounts for nearly 80% of the business, posted a 10% increase in profits, while the waste management business Viridor posted a 19.5% drop in profits.

A change in government policies is applying pressure to all sides of Pennon’s business. An increase in taxes on landfills and cost cutting by local authorities is squeezing the waste management unit. Viridor is going down the recycling route, and has reiterated its commitment to acquire 15% of that market share by 2020. If profits at Viridor keep slipping traders will at least want reassurances that the business is still on track.

South West Water’s business plan was granted ‘enhanced’ status by the regulator Ofwat, and it was the only water and waste company in the 2014 to achieve it. The high cost of living, relative to wage growth, has prompted the government to take action. Ofwat proposes that bills will be 5% lower before inflation is factored in during the next five to six years. December 12 will be the date the government makes its final decision, with changes coming into effect on 1 April 2015. Whatever way you look at it, Pennon Group is going to come under increased interference from the government, which will make turning a profit notably harder.

The company will announce its full-year figures in June 2015, with analysts expecting revenue to be £1.32 billion and an adjusted net income of £143 million. This would equate to revenue being flat on the year and adjusted net profit falling by 8%.

Equity analysts are very much in the hold territory when it comes to Pennon Group. Out of the 15 recommendations five are buys, six are holds and four are sells; the average target price for the stock is £8.03, which is over 5% below the current price.

Looking at its competitor United Utilities, analysts hold a more negative outlook. Out of the 20 ratings, three are buys, nine are holds and eight are sells, even though the current price is £9.08 and the average target price is £8.63.

In relation to Pennon’s figures, dealers are anticipating first-half revenue of £633 million and adjusted net income of £71.45 million.

The share price is currently trading at £8.48; previous pullbacks have been halted at £8.37, which coincides with the 200-hour MA. If that level is taken out the next level of support will be at £8. The record of £8.70 is the immediate target to the upside, and beyond that £9 will be the next milestone.

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