Stocks in Focus: Pennon Plc

industrial pipes

This week Girish Ramrous of NW Brown Wealth Management looks at Pennon Plc, following reports last week that it is preparing to sell off its waste management division, Viridor.

Pennon announced a strategic review in September last year, in which it said that it was considering options for the division in question. Investment bankers at Morgan Stanley and Barclays have now been appointed to lead the bidding process. US private equity firm KKR made an early £4bn bid last year, which was subsequently rejected. If similar new bids are received, they will be almost equivalent to Pennon’s entire market capitalisation of £4.6bn. Last week, shares surged more than 9% on the day the news was reported and the stock is now trading at an all time high.

Pennon’s waste management arm has performed very well over the past couple of years and now accounts for a little over half of group revenues. The UK’s improved focus on the need to control plastic consumption and optimise recycling efficiency has fuelled this positive performance and Viridor is at the forefront of this change. The hope is that the recent updates in the government’s Resources & Waste Strategy will continue this momentum and grow the business further.

The recycling and waste management sector is attractive to investors because it generates a steady stream of revenues and contracts are often long term, providing potential buyout groups with visibility on future cash flows. Last year KKR highlighted this opportunity by saying that “responsibly managing waste is a critical global challenge”. On top of this, there has been growing demand for environmentally friendly investments and socially responsible companies.

Pennon commented that it will consider all options during the review process and the group will update the market when it is appropriate to do so.

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