Pennon is leaking market confidence amid Brixham water crisis

The competition is undeniably stiff, but Pennon (PNN), owner of South West Water (SWW), is making a good attempt at becoming the most unpopular utility company in the UK after the residents of the pretty fishing port of Brixham had to boil their water following a recent cryptosporidium outbreak.

This, combined with ongoing rows over sewage dumping and the huge question mark over the future ownership of the industry, meant the market was happy to dump the shares indiscriminately on results day.

The cost of the Brixham outbreak alone is put at £3.5mn as SWW must refund affected customers and, being post period, investors can expect this to feed negatively into the 2025 results. In the context of widening losses, these operational costs are becoming increasingly material events. For example, this also follows on from the £2.4mn hit to dividends that investors had to swallow this year after an Environment Agency-imposed fine.

All of this comes at a time when costs are shooting up due to a massive increase in capital expenditure. When spending for SWW and the group is added together, Pennon’s capex was £1.22bn, compared with £716mn at this point last year. Admittedly, capex should peak within the next couple of years, but the numbers are notable when the company is sitting on combined net debt of over £6.76bn.

Hedge funds have reportedly taken out large short positions against many of the listed water companies. With uncertainty over Thames Water’s future still dominating the headlines and public and political patience with the industry dangerously low, the returns on offer just aren’t worth the risk. Sell.

Last IC view: Hold, 731p, 29 Nov 2023