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Severn Trent - Interims In-Line

Keith Bowman | 26 November 2015 | A A A
Severn Trent - Interims In-Line

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Severn Trent plc Ordinary 97 17/19p

Sell: 2,790.00 | Buy: 2,792.00 | Change 0.00 (0.00%)
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Interim Headlines:

These results were pretty closely in line with market expectations. Revenue growth was modest, reflecting a price freeze in the current year, but profits were supported by a lower interest bill. Overall, interim profits were £174.7m (2014: £154.7m ). After the current year, prices are planned to rise by a fraction less than RPI each year. Dividends are reduced by 5% to 32.3p per share, as previously announced, but the company aims to grow them at least in line with RPI inflation, after the current financial year.

Severn Trent are busily cutting costs, taking out layers of management, in a £370m cost cutting programme, whilst still investing large sums to improve water and sewerage quality, alongside a major programme to improve the resilience of Birmingham's water supply.

CEO Liv Garfield commented: "I am pleased to report strong progress in the first half of the year, marking a good start to the new regulatory period. As we continue to become an even more customer focused business we have delivered some great improvements, evidenced by the decline in customer complaints, and we continue to have the lowest combined bills in Britain. We are committed to delivering continued outperformance for the benefit of our customers, colleagues and shareholders, having already delivered tangible results in the first half. Thanks to the great work of our teams we have now secured all £372 million of our targeted AMP6 efficiencies while also delivering better service to our customers. Through more intensive management of our network we are seeing reduced supply interruptions, lower sewer flooding incidents and faster incident response times. Our renewable energy programme continues its rapid roll out and we are on track to generate the equivalent of 50% of our energy needs by 2020. With our operational metrics showing strong improvement, I would like to thank all of my colleagues across the group for their continued hard work in delivering great service for our customers each and every day."

Our view:

Severn Trent is a straight-forward water utility, providing water and sewerage services to customers in the Midlands, along with commercial services across the UK and internationally. We shouldn't get too excited about the latter; the regulated utility division generated 98% of the group's operating income last year.

Water and sewage prices are regulated, with Ofwat setting price limits every five years, after examining each water company's business plans. The regulator has a track record of setting tough, but achievable limits that allow efficiently run water companies to achieve acceptable financial returns.

Severn Trent has historically coped well under Ofwat's price limits. There seems little reason to expect this to change, given recent trading updates. With revenues that are linked by Ofwat's price formula to RPI, Severn Trent has a relatively predictable level of real income. That visibility of income has previously attracted outside interest from major pension and infrastructure funds, interest that could be renewed in future.

Barring that outcome, Severn Trent is committed to a dividend policy of paying dividends linked to the rate of growth of RPI or above, after first reducing the base level by 5% in the current financial year. With RPI under 1 % at the moment, income growth prospects look muted in the near term. Investors looking for rising utility yields might want to consider Pennon Group, owners of South West Water, where the dividend policy for the current regulatory period is for growth of RPI + 4% per annum.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.