Severn Trent Plc Ordinary 97 17/19p (SVT)

Company overview

Severn Trent is a group of companies employing more than 15,000 people across the UK, US and mainland Europe, with some involvement in the Middle East. It is traded on the London Stock Exchange and is a constituent of the FTSE 100 Index. Severn Trent Water provides water and sewerage services to over 3.7 million households and businesses in the Midlands and mid Wales. The group also operates a non-regulated business. Severn Trent Services is one of the world's leading suppliers of water and waste water treatment solutions. Headquartered in the US, it has a growing presence in Europe, the Middle East and Asia. The business has three main divisions: Water Purification, Operating Services and Analytical Services.

HL Comment (25 November 2011)

Coventry headquartered utility company, Severn Trent PLC has seen its pre-tax profits fall 35% to £65.3 million (from £101.1 million the year before) in its half-year results announced today, (25 Nov) as the company invests in its network. However, with exceptional items and losses on financial instruments stripped out, profits were relatively flat, at £155.0 million year on year. The company incurred losses of £70.2 million on its hedging instruments, a significant increase on the £50.7 million loss it took in the first half of last year. Overall, group turnover in the six months to 30 September, edged up 2.1% to £886.0 million. Within Severn Trent Water, customer consumption of water was broadly unchanged from the year before, which meant that the 4.7% increase in prices led to a 4.7% increase in turnover to £735.0 million. Consumption in the second half of the year is expected to be consistent with the trend seen in the first half. Elsewhere, at Severn Trent Services, the company said it had taken a provision of £21.9million in exceptional charges related to its Operating Services business in Italy. There were concerns on whether the company will be able to recover its economic interest in the Servizio Idrico Integrato business, which has run into refinancing difficulties. Management added that the utility did not expect to see any upturn in the challenging market environment before the start of its next financial year and full year performance is expected to be weighted to the second half.

Negative Points:

• The difficult economic backdrop had impacted at the group's water services unit that provides water and waste treatment in Europe and North America, with Italian operations being particularly hard hit.
• Profitability from the Severn Trent's core water business is dependent on the group’s ability to meet tough regulatory efficiency targets.
• Net debt at the end of September stood at £3.76 billion, versus net debt of £3.87 billion six months earlier and debt of £3.72 billion at the end of September 2010.

Positive Points:

• The company has increased its network replacement activity underpinning plans to improve network serviceability, supply availability and unplanned interruptions.
• "The transfer of private drains and sewers had gone smoothly", said management with the group due to provide an overview of activity and expenditure levels at its year end.
• Severn Trent is subject to occasional takeover rumours.
• The group's defensive nature provides investor attraction when set against an uncertain economic backdrop.
• The Board declared an interim dividend of 28.04p per share (2010 - 26.04p per share). The company added that it remained committed to its dividend payment policy of 3% above retail price inflation (RPI).

Consensus:

On balance, market consensus indicates a cautious buy.

All yield figures are variable and not guaranteed.

Fundamental Data

Values are quoted in the stock's local currency: British pound.