Will Pennon Group plc Outperform National Grid plc, SSE PLC, Severn Trent Plc And United Utilities Group PLC After H1 Results?

Does Pennon Group plc (LON:PNN) have more upside than utility peers National Grid plc (LON:NG), SSE PLC (LON:SSE), Severn Trent Plc (LON:SVT) and United Utilities Group PLC (LON:UU)?


Pennon Group plc (LON:PNN) (PNN.L) has released H1 results. They show that the company has delivered a good performance across its water and waste businesses. For instance, South-West Water has achieved sector-leading RORE of 11.7%, while Viridor is on target to contribute the expected £100 million of EBITDA from its ERF portfolio in the full year.

Pennon’s adjusted EBITDA of £277.2 million was 6% higher than in H1 2015. This has allowed it to increase dividends in line with its planned rise of 4% above RPI inflation. This target is set to remain in place until 2020, which increases the appeal of Pennon during what is expected to be an increasingly inflationary environment. It yields 4.4% at this moment in time.

Investing for growth is a key policy objective for Pennon. It will now commit £252 million to an ERF at Avonmouth, which expands its portfolio to 12 plants. This will add to the already expected significant increase in EBITDA from its ERF portfolio once all facilities are fully operational.

More efficiencies are ahead following South West Water’s £80 million of Totex savings since the beginning of K6. Pennon’s Shared Services Review will also increase total group savings from the £11 million previously announced to around £17 million per annum from 2019.

Pennon has risen by 1% in the last year. That’s ahead of utility peers National Grid plc (LON:NG), SSE PLC (LON:SSE), Severn Trent Plc (LON:SVT) and United Utilities Group PLC (LON:UU). National Grid is down 3%, SSE is flat, United Utilities has fallen by 6% and Severn Trent is up 0.5% in the last twelve months.

In my view, Pennon has scope to rise relative to its sector peers. I feel that its dividend growth commitment will provide consistency during what could be a turbulent period for the UK economy and UK shares. Its cost savings and planned investment could also push profit higher and do likewise for its share price.

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