May 23, 2013 7:51 pm

Pennon hit by fall in demand for recycled waste

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A downturn at Pennon’s Viridor waste management business has prompted the group, which also owns South West Water, to report writedowns approaching £200m and a sharp fall in full-year pre-tax profits.

Viridor operates a network of landfill sites, recycling and waste incinerator plants across the UK, and normally contributes about a third to Pennon Group profits. But poor domestic and international demand for its recycled waste – along with asset impairment charges totalling £189m, centred on its declining landfill business – dragged down group performance.

In the year to March 31, pre-tax profit before exceptional charges at Viridor fell by more than a third to £36m, while pre-tax profits at South West Water rose 7.5 per cent to £152m.

Pennon had signalled in February that it was reviewing the asset valuations at its waste management arm in the face of a sharp fall in recycling demand. On Thursday, Ken Harvey, chairman, suggested there would be no early recovery, as prices of waste material – known as “recyclate” – remained depressed.

“Recyclate prices have fallen back sharply from the peak reached in the first half of 2011-12, reflecting world economic conditions including weakness in the eurozone economies and uncertainty about the speed of growth in China,” he said.

“Revenues per tonne have recovered a little from their lows of October to December 2012 but we remain cautious about the prospects for further recovery in the short term.”

In the past year, the average revenue commanded by a tonne of recycled rubbish – including payments for collecting it and subsequent sales of recyclate – has fallen from £118 to £99.

Falling margins on recyclates were among the factors that prompted lenders to Biffa, the UK’s second-largest waste management group by sales, to take control of the debt-laden company in November – four years after it was acquired by private equity firms for £1.7bn in 2008.

Pennon said Viridor had mothballed or closed six recycling plants in the past year and made 152 redundancies across its business. It has also had to make £90m of increased provisions for the maintenance of sites after their closure.

The company now expects to be operating just three landfill sites by 2020, compared with 21 at present.

However, Mr Harvey insisted that Viridor was well positioned to achieve its planned transformation from predominantly a landfill operator to a leader in waste recycling and incineration.

Pennon also said that customers of its South West Water business, who are already set to receive a government-funded £50 rebate of per household, would benefit from service improvements as a result of a £60m investment in its network.

The government grant is forecast to cut the average annual household water bill 7.3 per cent to £499.

In spite of the sharp fall in pre-tax profits, Pennon raised its recommended full-year dividend 8 per cent to 28.46p – uncovered by earnings per share, which fell from 47.8p to 7.4p, but justified by the company on the basis of higher underlying operating profits.

Analysts at Deutsche Bank described the results as “broadly in line with our expectations, stripping out one-offs” but noted they “reflected the challenging performance of [Pennon’s] waste business Viridor”. 

Pennon shares closed 0.5p down at 704p on Thursday.

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