Pennon Group share price: 4 things to watch out for in its full-year results

Over the last 12 months, Pennon Group's share price has climbed more than 30% higher to £7.89, recovering from a low of £5.83 in March last year, with investors eagerly awaiting an update on its performance in its full-year results scheduled for publication on 30 May.

However, the water utility and waste management company did release a trading update on Monday that confirmed its underlying financial performance for the year ending 31 March is in line with its own guidance.

South West Water momentum continues

South West Water continues to deliver strong operational and financial performance, with a focus on efficiency and customer service. RORE is on track for consistent continued outperformance for 2018/19 with an expected cumulative rate of 11.8%.

Momentum is being maintained in respect of achieving both the £300 million target for Total Expenditure (Totex) outperformance and delivery of further net Outcome Delivery Incentive (ODI) rewards.

South West Water's business plan for 2020-2025 has qualified for a 'fast track' process, the only water company to have achieved this status for two consecutive price reviews.

Pennnon hit by £16 million Interserve bill

The water utility and waste management company revealed that it will take a £16 million hit as a result of financial problems at its collapsed infrastructure partner Interserve. Pennon had previously allocated £8 million to cover its exposure to Interserve but was forced to announce to shareholders that this figure has since doubled.

‘We will continue to pursue recovery of all amounts due from the operating subsidiary Interserve Construction Ltd and will take all the necessary legal and procedural steps to achieve this,’ the company said.

Viridor drives underlying EBITDA growth

The three new ERFs at Glasgow, Beddington and Dunbar have all progressed through commissioning to service commencement ahead of full operation. Optimisation is ongoing and operations will continue to ramp up over the next 18 months in line with the pattern experienced already in our existing portfolio.

In line with management expectations, the existing assets in our ERF portfolio have continued to perform ahead of our base case scenario, underpinning the full year results forecast.

Work at the Avonmouth ERF has progressed as expected this year with all major process equipment parts and steelwork for the building in place.

‘Recyclate prices have remained largely stable over the period albeit with increasing customer quality requirements in line with recent trends,’ the company said.

‘Viridor has continued with targeted investment in its recycling assets in order to improve output quality, including a focus on reliability centred maintenance and working with its customers to improve the quality of input materials.’

Pennon stock overvalued

Pennon has a price/earnings (PE) of 15x, suggesting that the stock may be overvalued, especially when its larger rivals United Utilities Group and Severn Trent by comparison have a PE ratio of 16x and 15.4x respectively.