What is PNN.L's Intrinsic value?

Pennon Group PLC (PNN.L) Intrinsic Value Analysis

Executive Summary

As of May 29, 2025, Pennon Group PLC's estimated intrinsic value ranges from $1.57 to $350.36 per share, depending on the valuation methodology applied.

Valuation Method Fair Value (USD) Implied Upside/Downside
Dividend Discount Model (Multi-Stage) $1.57 -99.7%
Earnings Power Value $350.36 -30.3%

Is Pennon Group PLC (PNN.L) undervalued or overvalued?

With the current market price at $503.00, the stock appears to be significantly overvalued.

Understanding Intrinsic Value

Intrinsic value represents the "true" worth of a company based on its fundamentals rather than market sentiment. We've employed multiple methodologies to triangulate Pennon Group PLC's intrinsic value, including:

  1. Dividend Discount Model (DDM): Values the company based on expected future dividend payments
  2. Earnings Power Value (EPV): Values the company based on its current earnings power, assuming no growth

Weighted Average Cost of Capital (WACC)

The cost of capital is a critical factor in valuation models, representing the required return for investors.

WACC Component Low High
Long-term bond rate 4.0% 4.5%
Equity market risk premium 6.0% 7.0%
Adjusted beta 0.4 0.71
Cost of equity 6.4% 9.9%
Cost of debt 4.0% 15.8%
Tax rate 19.0% 19.0%
Debt/Equity ratio 1.64 1.64
After-tax WACC 4.4% 11.7%

Valuation Methods

2. Dividend Discount Model (DDM)

The DDM values a company based on its expected future dividend payments. We used two approaches:

Multi-Stage DDM:

  • Current payout ratio: 0.0%
  • Stable payout ratio: 90.0%
  • Growth transition: 5 years
  • Cost of equity: 8.2%
  • Long-term growth rate: 3.6%
  • Fair value: $1.57 (-99.7% from current price)

Stable DDM:

  • Stable payout ratio: 70% (Low) to 90% (High)
  • Cost of equity: 9.9% (Low) to 6.4% (High)
  • Long-term growth rate: 3.0% (Low) to 4.2% (High)
  • Fair value range: $(88) to $(357)
  • Selected fair value: $-222.39 (-144.2% from current price)

3. Earnings Power Value (EPV)

EPV assesses a company's value based on its current normalized earnings power, assuming no growth.

EPV Component Value
Normalized Earnings $381M
Discount Rate (WACC) 11.7% - 4.4%
Enterprise Value $3,254M - $8,598M
Net Debt $4,270M
Equity Value $(1,016)M - $4,328M
Outstanding Shares 5M
Fair Value $(215) - $916
Selected Fair Value $350.36

Key Financial Metrics

Metric Value
Market Capitalization $2377M
Enterprise Value $6648M
Trailing P/E 0.00
Forward P/E 0.00
Trailing EV/EBITDA 5.75
Current Dividend Yield 522.38%
Dividend Growth Rate (5Y) -10.31%
Debt-to-Equity Ratio 1.64

Investment Decision Framework

To determine the most reliable intrinsic value estimate, we weigh each valuation method based on:

  1. Forecast Certainty: DCF methods rely on long-term projections, while earnings power value focuses on current normalized earnings
  2. Business Model Alignment: Dividend models are more appropriate for mature companies with established dividend policies
  3. Historical Accuracy: How well each method has predicted fair value historically

Valuation Weight Matrix

Valuation Method Weight Weighted Value
Dividend Discount Model (Multi-Stage) 67% $0.31
Earnings Power Value 33% $35.04
Weighted Average 100% $117.83

Investment Conclusion

Based on our comprehensive valuation analysis, Pennon Group PLC's weighted average intrinsic value is $117.83, which is approximately 76.6% below the current market price of $503.00.

Key investment considerations:

  • Strong projected earnings growth (-1% to 0% margin)
  • Consistent cash flow generation

Given these factors, we believe Pennon Group PLC is currently significantly overvalued with the potential for long-term appreciation based on the company's growth trajectory and financial strength.