Pennon Share Discussion Threads

[poikka] 14/6/2020 09:08

I sold on the results. I suppose that there was a good reason to sell Viridor, but the benefit to shareholders escapes me.

[rimau1] 14/6/2020 07:59

Pierre, its a bit better than that. In your valuation you are not giving any value to the cash retained for strengthening the balance sheet / future strategic investments. If £1.25bn is returned, say £2bn of debt and pension payments leaves a sum on the balance sheet, anywhere between £250-500m. This is why there is sum-of-the-parts value under £11 a share IMO. There is no right or wrong answer as we there are many moving parts suffice to say an interesting few weeks ahead.

[pierre oreilly] 13/6/2020 10:07

Rim, just some thoughts using your numbers (which agree roughly with my views too)

You say divi to be il 2.5-3.0%, so say 2.75%, fair enough.

We know the post-everything pnn divi will be about 21.11p, meaning a share price (@2.75%) of £7.68p when all done and dusted, agree with that.

You expect £1-1.5bn (say 1.25bn) of the virid proceeds to be returned to shareholders (as a special divi - no evidence of that yet but still). So that means you expect a special of £2.97 per share.

So the total value you expect is £2.97 cash divi plus a pnn share price post return of £7.68, being £10.64. I suppose being generous, we could add on the upcoming divi of 30.11p making a grand total expected exall value of £10.94. That is a little better than i thought, and think, but it seem there's nothing left in the current price (let alone being risk free under £11!).

All fair enough and reasonable, except the risk of something not going as you envisage. I came out with a value a couple of quid less than using your assumptions. I don't like the very high implied p/e pnn will be sitting on post everything @7.68 (something like mid 20s) and to me the very high risk of the cash back not being cash in the hand. The risk of the cash into the pension pot being greater than you expect is large imv. All in all, the pnn price atm pretty much reflects the ex all value, if a little optimistically, imv.

Very interesting the security of pnn should the market as a whole tank. This would be a better place than most to avoid the worst of that.

[rimau1] 13/6/2020 08:47

Essential, i didn’t answer your question and i don’t think i can. Its all interrelated and i would need to understand the internal capital and debt optimisation plan. The level of net debt they hold post sale depends principally on how much they decide to return to shareholders, their current debt hedging strategy, and perceived value attributed to their equity at any given point. The good news is they can control their debt levels by tweaking the special so they will pretty much have a debt number in mind and back calculate. Suffice to say under £11 i see risk free value here now in advance of the sale. If markets tank again next week this is a nice place to park some cash IMO, (how many stocks in 2020 will give you a guaranteed return of X + inflation.) my only caveat is that i want a special to crystalise the value and I would only support a buyback if the stock tanks in a broader market selloff.

[essentialinvestor] 05/6/2020 15:26

That's a fair comment, the sector is red hot atm, so would expect
there to have been very significant interest?.

[meanreverter] 05/6/2020 15:12

EssentialInvestor: Are you confident that Pennon could have floated 49% of Viridor proportionately at 18.5 times EBITDA?

[essentialinvestor] 05/6/2020 14:26

What they should have done was floated 49% of Virdor (with the Virdor debt)
there by keeping a future income stream and longer term capital appreciation upside.

[essentialinvestor] 05/6/2020 13:54

rimau, have you calculated how much net debt needs to fall to reach the OFWAT
target range?.

I'm not familiar with those calculations. Thanks.

[bluemango] 05/6/2020 12:36

I'm out. Can't be doing with this kind of uncertainty and med to long term lower income, when there are other options around, particularly as this has had a good run.

[rimau1] 05/6/2020 07:17

Interesting views on here. I think the pension ongoing deficit is about £45m so that is a non issue in terms of materiality? Clearly a large chunk of the £3bn net debt needs paying off to get down to a 62-65% debt ratio that Ofwat requires. This really isn’t new news and has been well known and flagged for sometime, so if you are selling because you expected most of the £3.7bn to be returned then you shouldn’t have been holding, it was never going to happen! I reckon about £1-£1.5bn will be returned via a special dividend. I totally agree that a share buyback would be a waste and fully expect it to be a special. I think the index linked ongoing dividend will and between 2.5-3% which in the current environment of zero interest rates and lets face it potentially a stagflation shock will be highly desired. I bought in here post the strategic review announcement at a little under £9 and will add on any further drops below £11. Wrapped in a Sipp there is plenty of space for index linked 2.5% net returns albeit capital growth will only come with an overseas pension fund buying this which i also expect to happen.

[gateside] 04/6/2020 23:56

I'm beginning to wonder if they should have sold South West Water to some pension fund and kept Viridor.

[essentialinvestor] 04/6/2020 23:47

They now want to use some of the proceeds to reduce their pension deficit . So now that's reducing net debt, reducing the pension deficit and keeping
some cash for future opportunities, all before a yet undisclosed amount returned to investors.


Excluding lease liabilities and Virdor, Pennon net debt is £3 Billion.

As mentioned earlier this week, the amount returned may be lower than some expect.

[pierre oreilly] 04/6/2020 18:34

Thank mr, after i posted the above it made me think of the state pennon is in. About 10 minutes after my post, i sold the lot. It just looks pretty poor to me. The divi will be halved, and eventually the share price will be once the distribution of the cash from viridor has taken place. Now the way i see it, if it all was returned as cash, then that plus the halving of the share price and divi would be a good thing for shareholders. But what concerns me is that the cash will largely disappear into the pension fund, which won't help shareholders at all. The extra to go into developing the business in an unspecified manner can just effectively disappear too. Only part will be returned to holders - it's not known how much, and in what way. Often these days, a cash return doesn't actually mean cash in shareholders hands - a share buyback for example. That has long term benefits, but not short term. I also didn't like the reporting of the divi being increased by quite a chunk, when we know after this one, it will be halved, so just seems like pr to me. I've held for two years, and intended to hold longer, but it doesn't look great for shareholders to me. (I'm not looking to 'get back in' cheaper, these are genuine views which, of course, could be proved completely wrong). I have no idea yet where i'll put the cash raised.

[meanreverter] 04/6/2020 13:32

Thanks, Pierre. What you say makes sense: that the basis of the calculation is Viridor's (unmentioned) annual PROFIT — not the proceeds of the sale.

Working backwards, we get a profit for Viridor of £0.2266 × 0.42bn = £95m, or about 37% of EBITDA, which was the basis of the calculation for the 18.5 times multiple to get an enterprise value of £4.2bn. That looks credible. Anyway, it looks as though Pennon got a pretty decent price for Viridor.

[pierre oreilly] 04/6/2020 12:59

I'll have a bash. Haven't read the report yet, but just speculating on what you've reproduced, I'd guess that the portion of the divi due to the viridor profit is 22.66p, the remnants produce a 21.11p contribution to divi. So yes, in the future, the divi will be 'rebased' to 21.11p, and increased annually from there. Looks like they've sold a lot of profit in viridor, hence future divis will be based on the profit remaining after the viridor sale. It says nothing about the cash raised from viridor, a portion of which will be returned to shareholders - so a portion of the £10 per share cash from the sale we'll get somehow or other. (No idea if they have said how in the annual report yet). I'm just speculating from what you posted, it may all be completely wrong and i may have got the wrong end of the stick.

[meanreverter] 04/6/2020 11:55

From today's final results:

“The crystallisation of the Viridor sale is equivalent to 22.66p per share of the recommended 2019/20 dividend. This implies a Continuing Group dividend (after excluding Viridor) of 21.11p per share.”

I am baffled as to the meaning of this. The second sentence suggests that the annual dividend will be reduced from 43.77p to 21.11p, although I don't understand the logic of the referred-to implication. The first sentence is even more baffling: How can a “crystallisation of a sale” (whatever that is) be equivalent to a portion of an annual dividend? The cash value of the Viridor sale (at £4.2bn) divided by the number of shares in issue (~0.42bn) is about £10, which is more than 40 times 22.66p.

Could anyone explain this to a dimbo like me in terms that I can understand?

[chc15] 04/6/2020 08:48

Seems good, price down, this always happens!

[rimau1] 04/6/2020 07:55

Initial reaction is a generous dividend policy with it being index linked. I can see a little further value here

[rimau1] 03/6/2020 11:17

It had been well flagged that of the £3.7bn net, amounts would be retained for growth opportunities. All in line with expectations. As to the value of SWW as a pure water play my view is around £1.5bn as i think revenues are forecast between £450m-£500m under the new regulatory structure. So simple sum of parts is £5.2bn not much arbitrage left. For me the buy case will now depend on the dividend policy, if we end up with a decent dividend i.e 3%+ there is a strong case for SWW to be acquired as its a small add on for another infrastructure company or a pension fund.

[sllab101] 01/6/2020 22:31

Disappoint

[sllab101] 01/6/2020 22:30

My thinking as well, we may see some disillusionment!

[essentialinvestor] 01/6/2020 19:49

"..The Pennon Board intends to use the net cash proceeds to reduce Pennon’s company borrowings and make a return to shareholders, whilst retaining some funds for future opportunities..."


The capital return may be lower than some expect?.

[vatkins] 01/6/2020 17:03

What do people think this share is really worth? I'm not asking as i view it as a speculative pubt, i don't, (long term holder) but was wondering do we think there is still an arbitrage value between what the share price is and what it will be when the 3.7Bn drops into the bank? I was thinking if Viridor is worth £8.78 a share approx, what is the water business worth? crudely i came up with £5.55 a share, this gives a £14.33 / sh fig.... still some value to be had here? tempted to buy some more take the fat dividend and say to myself next year, "look see you did still receive some dividends..... " while not focusing on the lost capiatl!

interesting company and great valuation achievied on Viridor

[discodave4] 12/5/2020 19:16

RedThey get funded for their "challenges" via the amount they are allowed by the regulator to charge customers. So in principle it's a level playing field, that's one of the primary duties of the regulator.

[discodave4] 12/5/2020 19:13

The average total dividend yield in 2019 across the sector was 4.6%.In 2018 Ofwat mentioned a nominal 5% dividend yield as the base level. And in line with this the average total dividend yield in 2019 across the sector was 4.6%, However, the new OFWAT CEO (Johnson Cox) re-set that for their PR19 period (2020-2025) to 2.96%. That said South West Water we're fast-tracked and I believe their blended average equity return is 3.9% for the 5 year period (Https://www.pennon-group.co.uk/system/files/uploads/financialdocs/sww-fd-investor-summary.pdf) which isn't too far off their historic yield of 3.5%-3.8%. Guess time will tell what they actually do now due to the impacts of Covid-19.