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Pennon Group

LSE:PNN
Snowflake Description

6 star dividend payer with mediocre balance sheet.

The Snowflake is generated from 30 checks in 5 different areas, read more below.
PNN
LSE
£3B
Market Cap
Water Utilities
Company description

Pennon Group Plc engages in the environmental infrastructure businesses worldwide. More info.


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3 Month History
PNN
Industry
5yr Volatility vs Market

Value

 Is Pennon Group undervalued based on future cash flows and its price relative to the stock market?

Value is all about what a company is worth versus what price it is available for. If you went into a grocery store and all the bananas were on sale at half price, they could be considered undervalued.
INTRINSIC VALUE BASED ON FUTURE CASH FLOWS
Here we compare the current share price of Pennon Group to its discounted cash flow value.

The discounted cash flow value is simply looking at what the company is worth today, based on estimates of how much money it is expected to make in the future.

How is this discounted cash flow calculated?

  • The current share price of Pennon Group is above its future cash flow value.
Often investors are willing to pay a premium for a company that has a high dividend or the potential for future growth.
PRICE RELATIVE TO MARKET
We can also value a company based on what the stock market is willing to pay for it. This is similar to the price of fruit (e.g. Mangoes or Avacados) increasing when they are out of season, or how much your home is worth.

The amount the stock market is willing to pay for Pennon Group's earnings, growth and assets is considered below, and whether this is a fair price.
Price based on past earnings
Are Pennon Group's earnings available for a low price, and how does this compare to other companies in the same industry?
  • Overvalued based on earnings compared to the Utilities industry average.
  • Good value based on earnings compared to the overall market.
Price based on expected Growth
Does Pennon Group's expected growth come at a high price?
  • Poor value based on expected growth next year.
Price based on value of assets
What value do investors place on Pennon Group's assets?
  • Good value based on assets compared to the Utilities industry average.
X
Value checks
We assess Pennon Group's value by looking at:
  1. Is the discounted cash flow value less than 20%, or 40% of the share price? (2 checks) (Click here or on bar chart for details of DCF calculation.)
  2. Is the PE ratio less than the market average, and/ or less than the Utilities industry average (and greater than 0)? (2 checks)
  3. Is the PEG ratio within a reasonable range (0 to 1)? (1 check)
  4. Is the PB ratio less than the Utilities industry average (and greater than 0)? (1 check)
  5. Pennon Group has a total score of 2/6, see the detailed checks below.

    Note: We use GAAP Earnings per Share in all our calculations including PE and PEG Ratio.
    Note 2: PEG ratio is based on analysts EPS growth expectations in 1 year (12.78%).

    Full details on the Value part of the Simply Wall St company analysis model.
X
Discounted cash flow (Free cash flow to Equity)

The calculations below outline how an intrinsic value for Pennon Group is arrived at by discounting future cash flows to their present value. We use analyst's estimates of cash flows going forward 5 years.

See our documentation to learn about this calculation.

5 year cash flow forecast

Present value of next 5 years cash flows:
£627

Terminal Value

Terminal Value = FCF2021 × (1 + g) ÷ (Discount Rate – g)

Terminal Value = £212 × (1 + 1.2%) ÷ (8.23% – 1.2%)

Terminal value based on the Perpetuity Method where growth (g) = 1.2%:
£3,031

Present value of terminal value:
£2,041

Equity Value

Equity Value (Total value) = Present value of next 5 years cash flows + terminal value

Value = Total value / Shares Outstanding (£2,667 / 418)

Value per share:
£6.37

Current discount (share price of £8.1): -27%



Estimate of Discount Rate

The discount rate, or required rate of return, is estimated by calculating the Cost of Equity.

Discount rate = Cost of Equity = Risk Free Rate + (Levered Beta * Equity Risk Premium)

Discount rate = 8.23% = 1.17% + (0.8 * 8.83%)



Estimate of Bottom Up Beta

The Levered Beta is the Unlevered Beta adjusted for financial leverage. It is limited to 0.8 to 2.0 (practical range for a stable firm).

Levered Beta = Unlevered beta (1 + (1- tax rate) (Debt/Equity))

0.732 = 0.414 (1 + (1- 21%) (97.53%))

Levered Beta used in calculation = 0.8



Assumptions
  1. The risk free rate of 1.17% is from the 10 year government bond rate in GB.
  2. The bottom-up beta is estimated by analysing other companies in the same industry.
  3. The Equity Risk Premium is calculated by subtracting the risk free rate from the market return premium (10%) (source: Buffet).
  4. The dividend discount model is automatically used for companies in the following industries: Banks, Insurance, Real Estate Investment Trusts (REITs), Diversified Financial Services and Capital Markets.

Future Performance

 How is Pennon Group expected to perform in the next 1 to 3 years based on estimates from 10 analysts?

    The future performance of a company is measured in the same way as past performance, by looking at estimated growth and how much profit it is expected to make.

    Future estimates come from professional analysts. Just like forecasting the weather, they don’t always get it right!
    3 year growth
    31%
    Expected earnings growth over 3 years.
    Future Earnings growth analysis
    Is Pennon Group expected to grow at an attractive rate? We look at the 1 year and 3 year growth below.

    Are Pennon Group's annual earnings growth expected to exceed 1.8% over the next 3 years?

    • After 1 year
    • After 3 years
    1 & 3 year estimated growth in earnings
    Past and Future Earnings per Share
    The accuracy of the analysts who estimate the future performance data can be gauged below. We look back 3 years and see if they were any good at predicting what actually occured. We also show the highest and lowest estimates looking forward to see if there is a wide range.
    Analysts growth expectations
    2 year growth check
    Super high growth metrics x1.5?

    Which of the these is expected to increase by over 50% in 2 year's time?

    • Revenue
    • Cash flow
    • Profit
    Performance in 3 years
    In the same way as past performance we look at the future estimated return (profit) compared to the available funds. We do this looking forward 3 years.
    • Pennon Group is not expected to perform strongly, Return on Equity (ROE) in 3 years is estimated to be below 20%.

    Improvement & Relative to industry
    • Expected to be less than the Utilities industry average.
    • An improvement in Pennon Group's performance (ROE) is expected over the next 3 years.
    X
    Future performance checks
    We assess Pennon Group's future performance by looking at:
    1. Is the growth in earnings expected to beat the low risk savings rate, plus a premium to keep pace with inflation, in 1 year and 3 years? (2 checks)
    2. Does the average analyst expect Revenue to increase by 50% or more in 2 years? (1 check)
    3. Does the average analyst expect Operating Cash Flow to increase by 50% or more in 2 years? (1 check)
    4. Does the average analyst expect Net Income (Profit) to increase by 50% or more in 2 years? (1 check)
    5. Is the Return on Equity in 3 years expected to be over 20%? (1 check)
    Some of the above checks will fail if the company is expected to be loss making in the relevant year.
    Pennon Group has a total score of 2/6, see the detailed checks below.

    Note: If no +3 year data is available, +2.5 year data may be used.

    Note 2: We use GAAP per Share in all our calculations.

    Full details on the Future part of the Simply Wall St company analysis model.

    Past Performance

     How has Pennon Group performed over the past 5 years?

    The past performance of a company can be measured by how much growth it has experienced and how much profit it makes relative to the funds and assets it has available.
    Past earnings growth
    Below we compare Pennon Group's growth in the last year to its industry (Utilities).
    Past Earnings growth analysis
    We also check if the company has grown in the past 5 years, and whether it has maintained that growth in the year.
    • Pennon Group's earnings growth has not matched the industry average in the past year.
    • Pennon Group's 1 year earnings growth exceeds its 5 year annual average (7.5% vs -5.6%).
    • Pennon Group earnings have fallen over the past 5 years.
    Profit History
    Pennon Group's revenue and profit over the past 5 years is shown below, any years where they have experienced a loss will show up in red.
    Performance last year
    We want to ensure a company is making the most of what it has available. This is done by comparing the return (profit) to a company's available funds, assets and capital.
    • Poor return on shareholders funds (ROE) last year.
    • Pennon Group performed worse than the Utilities industry average based on return on assets (ROA) last year.
    • Performance based on revenue producing assets (ROCE) is broadly the same over 3 years.
    X
    Past performance checks
    We assess Pennon Group's performance over the past 5 years by checking for:
    1. Has earnings per share (EPS) increased in past 5 years? (1 check)
    2. Has the EPS growth in the last year exceeded that of the Utilities industry? (1 check)
    3. Is the current EPS growth higher than the average annual growth over the past 5 years? (1 check)
    4. Is the Return on Equity (ROE) higher than 20%? (1 check)
    5. Is the Return on Assets (ROA) above industry average? (1 check)
    6. Has the Return on Capital Employed (ROCE) increased from 3 years ago? (1 check)
    The above checks will fail if the company has reported a loss in the most recent earnings report. Some checks require at least 3 or 5 years worth of data.
    Pennon Group has a total score of 2/6, see the detailed checks below.

    Note: We use GAAP Earnings per Share in all our calculations.

    Full details on the Past part of the Simply Wall St company analysis model.

    Health

     How is Pennon Group's financial health and their level of debt?

    A company's financial position is much like your own financial position, it includes everything you own (assets) and owe (liabilities).

    The boxes below represent the relative size of what makes up Pennon Group's finances.

    The net worth of a company is the difference between its assets and liabilities.
    Net Worth
    • Pennon Group is able to meet its short term (1 year) commitments with its holdings of cash and other short term assets.
    • Pennon Group's long term commitments exceed its cash and other short term assets.
    Balance sheet
    This treemap shows a more detailed breakdown of Pennon Group's finances. If any of them are yellow this indicates they may be out of proportion and red means they relate to one of the checks below.
    Assets
    Liabilities and shares
    The 'shares' portion represents any funds contributed by the owners (shareholders) and any profits.
    • High level of stock/ inventory/ unsold assets.
    • Total debt is not covered by total short term assets.
    Historical Debt
    Nearly all companies have debt. Debt in itself isn’t bad, however if the debt is too high, or the company can’t afford to pay the interest on its debts this may have impacts in the future.

    The graphic below shows equity (available funds) and debt, we ideally want to see the red area (debt) decreasing.

    If there is any debt we look at the companies capability to repay it, and whether the level has increased over the past 5 years.
    • The level of debt (219%) compared to net worth is high (greater 40%).
    • The level of debt compared to net worth has been reduced over the past 5 years (314% vs 219% today).
    • Total debt is not well covered by annual operating cash flow (less than 20% of total debt).
    • Interest on debt is well covered by earnings (5.7x coverage).
    X
    Financial health checks
    We assess Pennon Group's financial health by checking for:
    1. Are short term assets greater than short term liabilities? (1 check)
    2. Are short term assets greater than long term liabilities? (1 check)
    3. Has the debt to equity ratio increased in the past 5 years? (1 check)
    4. Is the debt to equity ratio over 40%? (1 check)
    5. Is the debt covered by short term assets? (1 check)
    6. Are earnings greater than 5x the interest on debt (if comapany pays interest at all)? (1 check)
    7. Pennon Group has a total score of 3/6, see the detailed checks below.


    Full details on the Health part of the Simply Wall St company analysis model.

    Dividends

     What is Pennon Group's current dividend yield, its reliability and sustainability?

    Dividends are regular cash payments to you from the company, similar to a bank paying you interest on a savings account.
    Annual Dividend Income
    Dividend payments
    4.45%
    Current annual income from Pennon Group dividends. Estimated to be 5.09% next year.
    If you bought £2,000 of Pennon Group shares you are expected to receive £89 in your first year as a dividend.
    Dividend Amount
    Here we look how much dividend is being paid, if any. Is it above what you can get in a savings account? It is up there with the best dividend paying companies?
    • Paying above low risk savings rate. (2.3%)
    • Paying above the markets top dividend payers. (3.98%)
    Historical dividend yield
    It is important to see if the dividend for a company is stable, and not wildly increasing/decreasing each year. This graph shows you the historical rate to count toward your assessment of the stock.

    We also check to see if the dividend has increased in the past 10 years.
    • Dividends per share have been stable in the past 10 years.
    • Dividends per share have increased over the past 10 years.
    Current Payout to shareholders
    What portion of Pennon Group's earnings are paid to the shareholders as a dividend.
    • Dividends paid are covered by net profit (1.2x coverage).
    Future Payout to shareholders
    • Dividends after 3 years are expected to be covered by net profit (1.3x coverage).
    X
    Income/ dividend checks
    We assess Pennon Group's dividend by checking for:
    1. Firstly is the company paying a notable dividend (greater than 0.5%) - if not then the rest of the checks are ignored.
    2. Current dividend yield, is there one at all, is it higher than the low risk savings rate, and is it above the top 25% of dividend payers? (2 checks)
    3. Have they paid a dividend for 10 years, and during this period has the dividend been volatile (drop of more than 25%)? (1 check)
    4. If they have paid a dividend for 10 years has it increased in this time? (1 check)
    5. How sustainable is the dividend, can Pennon Group afford to pay it from its earnings today and in 3 years (Payout ratio less than 90%)? (2 checks)
    6. Pennon Group has a total score of 6/6, see the detailed checks below.


    Full details on the Dividends part of the Simply Wall St company analysis model.

    Management

     What is the CEO of Pennon Group's salary, the management and board of directors tenure and is there insider trading?

    Management is one of the most important areas of a company. We look at unreasonable CEO compensation, how long the team and board of directors have been around for and insider trading.
    CEO
    Chris Loughlin, image provided by Google.
    Chris Loughlin
    COMPENSATION£1,318,000
    AGE64
    CEO Bio

    Mr. Christopher Loughlin, also known as Chris, BSc Hons, MICE, CEng, MBA, has been Group Chief Executive Officer of Pennon Group Plc since January 1, 2016. Mr. Loughlin served as the Chief Executive Officer of South West Water Limited from August 1, 2006 to December 31, 2015. Mr. Loughlin served as Chief Operating Officer of Lloyd's Register. He started his career as a Consulting Engineer and subsequently held a number of senior positions at British Nuclear Fuels. He served as an Executive Chairman of Magnox Electric Plc. He serves as Non-Executive Director of Bournemouth Water Ltd. He has been an Executive Director at Pennon Group Plc since August 1, 2006. He served as an Executive Director of British Nuclear Fuels Ltd. Mr. Loughlin is a chartered civil engineer and has an honours degree in civil engineering and an MBA.

    CEO Compensation
    • CEO's compensation has been consistent with company performance over the past year.
    • CEO's compensation appears reasonable.
    Management Team

    Chris Loughlin

    TITLE
    Group Chief Executive Officer
    COMPENSATION
    £1,318,000
    AGE
    64

    Susan Davy

    TITLE
    Chief Financial Officer
    COMPENSATION
    £922,000

    Sarah Heald

    TITLE
    Director of Corporate Affairs & Investor Relations

    Helen Barrett-Hague

    TITLE
    Group General Counsel and Group Company Secretary

    Adele Barker

    TITLE
    Interim Group Director of Human Resources

    Stephen Bird

    TITLE
    Managing Director of South West Water
    Board of Directors Tenure

    Average tenure of the Pennon Group board of directors:

    Board tenure
    3.7 years
    • The tenure for the Pennon Group board of directors is about average.
    Board of Directors

    John Parker

    TITLE
    Chairman
    COMPENSATION
    £266,000
    AGE
    75

    Chris Loughlin

    TITLE
    Group Chief Executive Officer
    COMPENSATION
    £1,318,000
    AGE
    64

    Susan Davy

    TITLE
    Chief Financial Officer
    COMPENSATION
    £922,000

    Martin Angle

    TITLE
    Independent Non-Executive Director
    COMPENSATION
    £67,000
    AGE
    67

    Gill Rider

    TITLE
    Senior Independent Director
    COMPENSATION
    £72,000
    AGE
    62

    Neil Cooper

    TITLE
    Independent Non-Executive Director
    COMPENSATION
    £66,000
    AGE
    50
    Recent Insider Trading
    Who owns this company?
    X
    Management checks
    We assess Pennon Group's management by checking for:
    1. Is the CEO's compensation unreasonable compared to market cap and profit (greater than 0.5% of the company's profit + 0.03% of market cap)? (1 check)
    2. Has the CEO's compensation increased more than 20% whilst the EPS is down more then 20%? (1 check)
    3. Is the average tenure of the management team less than 2 years? (1 check)
    4. Is the average tenure of the board of directors team less than 3 years? (1 check)
    5. Pennon Group has a total score of 6/6, this is not included on the snowflake, see the detailed checks below.


    Note: We use the top 6 management executives and board members in our calculations.

    Note 2: Insider trading include any internal stakeholders and these transactions.

    Full details on the Management part of the Simply Wall St company analysis model.

    Company News

    Company Info

    Description

    Pennon Group Plc engages in the environmental infrastructure businesses worldwide. The company operates through Water, and Waste Management segments. The Water segment comprises the regulated water and wastewater services for customers in Cornwall, Devon, and parts of Dorset and Somerset serving 1.7 million customers; and water services in the areas of Dorset, Hampshire, and Wiltshire serving approximately 0.5 million customers. The Waste Management segment provides recycling, energy recovery, and waste management services serving approximately 150 local authorities and corporate clients, as well as 32,000 customers across the United Kingdom. The company operates 8 energy recovery facilities; 300 recycling, energy recovery, and waste management facilities; and 650 waste collection vehicles securing materials. Pennon Group Plc was incorporated in 1989 and is based in Exeter, the United Kingdom.

    Details
    Name:Pennon Group Plc
    Ticker:PNN
    Exchange:LSE
    Founded:1989
    Market Cap:£3,389 million
    Website:http://www.pennon-group.co.uk
    Listings
    Map

    Peninsula House, Exeter, EX2 7HR, United Kingdom

    Number of employees
    Street

    Current staff
    Staff numbers
    4,788
    Pennon Group employees.
    Industry
    Industry:Water Utilities
    Sector:Utilities