Pennon Group PLC's (LSE:PNN, OTC:PEGRY) trading statement will be overshadowed by the ongoing row over sewage discharges.
“The storm overflow investigation on Thames Water/Yorkshire Water/Northumbrian Water has been released in August, and we think the outcome for Pennon could be the next,” said UBS.
“Our analysis suggests a worst-case £54m penalty for the two s203 probes, potentially 10% of revs in the licence, but this seems unlikely based on precedents such as Thames Water/Yorkshire Water/Northumbrian Water paying 9%/7%/5% of water revs in the recent penalty decision from OFWAT.”
Elsewhere, water regulator Ofwat recently published its draft determination for how much water utilities can raise prices to pay for their planned expenditure in the coming five years.
The companies have submitted their responses ahead of a final determination in December.
UBS notes that Pennon secured a 3.8% allowed returns in the draft determination vs 3.66% for other companies though it believes allowed returns need to rise to c4.0% CPIH [inflation _housing movements] real to appear attractive on current macro.
A 10% reduction in total expenditure and 35% dividend cut are priced in at 613p, adds the Swiss bank.