‘Pee, paper and poo” is the alliterative if scatalogical slogan that Pennon dinned into the heads of 5,000 West Country schoolchildren last year, to make them more mindful of their environmental responsibilities. And, by teaching them not to put anything else down the loo, they will conveniently be helping to control the group’s water-treatment costs.
Such marriages of virtue and hard-headed business are, sadly, all too rare at the company, which is facing headwinds from inflation and higher interest rates for the year ending next March. Investors were unimpressed by yesterday’s annual results, clipping 28p, or 2.7 per cent, off the shares at £10.01. They have fallen from £13.12 since last August, despite the useful £425 million acquisition of Bristol Water in June 2021, mainly because of the worsening economic backdrop.
On the back of 6.7 per cent organic revenue growth, ebitda (earnings before interest, tax, depreciation and amortisation) for the year to March came in at £383.9 million, up 14.7 per cent and a shade higher than analysts’ consensus.
Operating profit was £237.2 million, up 10.2 per cent, while earnings per share were 50.2p, up 5 per cent. Pennon’s Rore (return on regulatory equity) was 8.9 per cent, reduced by Bristol’s 6.8 per cent, but yet again the highest in the quoted water sector. The retail operations, Pennon Water Services and Water2Business, turned from loss into profit. In 1998, the company changed its name to Pennon Group as it was no longer just South West Water but had included Viridor, its then expanding waste-management business. Viridor was sold two years ago, so instead, Pennon is now the umbrella name embracing South West, Bristol and Bournemouth Water, and waste management for the Isles of Scilly and elsewhere. Its core is still the southwest region, which includes Devon, Cornwall and parts of Dorset and Somerset.
The company is not averse to the idea of further “consolidation”, or takeovers, which would further dilute its geographical bias. Wessex and Portsmouth Water are two potential targets. Further down the line, the 1989 industry privatisation and deals has produced a national patchwork of listed and private owners, UK and foreign. That will surely be sorted out, and Pennon will emerge from that process in a strong position.
Its merger synergies are running at £20 million a year. Its regional composition has made it susceptible to Covid and its aftermath, as many people dashed west to escape the worst of the pandemic. This raised revenues and costs, much of which have continued, and are now compounded by inflation.
Pennon estimates costs this year will rise by about £40 million, while it is cutting customers’ charges, bringing them lower than a decade ago. And, with about £800 million of index-linked debt, every 1 per cent rise in inflation adds £8 million to its interest bill, costing a potential £30 million this year. That is partly offset by £675 million of inflation-linked revenue, but there is going to be an impact on the bottom line.
The management is comfortable that it can maintain its commitment to increasing the annual dividend by inflation plus 2 per cent without dipping into reserves, but it could be close-run as earnings per share may drop to about 45p. If inflation works out at 7 per cent by next spring, that could give a 41.9p dividend for a 4.14 per cent yield at the share price. Meanwhile, its share buyback is due to disperse another £200 million by this September, so its environmental achievements may have to take second place to pressures on the balance sheet. Analysts are adopting a cautious-to-neutral attitude to the shares in what could be a tricky year.
ADVICE Hold
WHY The company has long-term potential, but has several problems to overcome in the next ten months
Camellia
Camellia is a throwback to the era when the stock market was littered with companies that were, in reality, collections of businesses that happened to have caught the fancy of their founders or directors. While most have been taken over or broken up, this is one of a few that survive to offer a different type of investment choice.
Originally an owner of tea plantations in Kenya and India, tea is still Camellia’s staple source of income, making it vulnerable to movements in the prices of that commodity. But, over the years, the company has diversified into other forms of agriculture, such as apples, blueberries and avocados. Less logically, it is also in engineering as well as collections of impressionist paintings and antique books, which do at least provide some ballast. A controlling 51 per cent of the shares are held by the Camellia Foundation, which is devoted to improving education and health. Most of its income is swallowed by expenses.
The 2021 results, out yesterday, show a fall in revenue from £291 million to £277.2 million. While its average tea selling price was higher, avocado volumes and prices fell significantly. But profits from macadamia nuts and an arable farm in Brazil were higher. Horizon, a Californian farm, was sold and the money reinvested in Bardsley England, a big apple producer.
Pre-tax profit was £700,000 lower at £7.1 million, enabling earnings per share to swing from a 181p loss to a positive 83.3p. The dividend, seemingly unrelated to earnings, rose 2p to 146p. Net cash of £46.5 million, and an investment portfolio worth £35.8 million at April 30, account for half the company’s market capitalisation. The current year has started well, with “good” prices in Kenyan tea and a strong early season for India and Bangladesh. Other crops are said to be developing in line with expectations.
Malcolm Perkins, the chairman, commented: “Camellia withstood a range of challenges in 2021, several of which were unprecedented. The outlook for 2022 is positive overall, with both revenues and profits expected to be ahead of 2021.” While the shares are hardly the sort on which to base a portfolio, they yield a none-too-shabby 2.4 per cent.
ADVICE Buy
WHY There is solid demand for the company’s produce
