Pennon Group reports sharp jump in profits before tax

Pennon continued to deliver a good performance in the first half of its financial year at both its water and waste businesses, with costs savings and self-help initiatives falling straight to the bottom line.

South West Water delivered a sector-leading return on regulatory equity of 11.7%, while its Viridior waste cycling unit was on track to hit its target for operating profits amid improved margins, the company said in a statement.

Revenues declined 0.5% to £685.5m despite which profits before tax jumped 19.9% to £128.1m, with the latter driven by cost savings at South West Water and growth at Viridor by its ERFs and self-help measures at its recycling arm.

Earnings per share were up by 1.7% to 23.6p.

During the reporting period, the firm also decided to commit £252m to an energy recovery facility at Avonmouth, thus increasing its portfolio to twelve plants.

The utility also unveiled a new retail venture for business customers with South Staffs/Cambridge Water.

As a result of its Shares Services Review management also announced it had identified additional group cost savings of roughly £6.0m per year, on top of the approximately £11.0m already announced.

Management expressed confidence in its ability to meet its expectations for the full-year 2016/2017, which underpinned its policy of growing its dividend by 4% above RPI inflation each year to 2020.

"We believe Pennon is well positioned for the future and is on track to meet management expectations for the full year 2016/17. Our performance underpins our sector-leading dividend policy of 4% growth per annum above RPI inflation to 2020," Pennon said in a statement.

Statutory profits after tax increased 6.1% to £72.9m.

Following the results, analysts at HSBC bumped up their target price on the shares from 910p to 940p, telling clients that: "we maintain our Buy rating as we believe the stock combines regulatory stability and growth opportunities."

The interim dividend per share was increased 6% to 11.09p.