Welcome to HL's reimagined News, Insights and Research experience. Find out more

Share research

Severn Trent - H1 revenue benefits from rising prices

Half year group revenue rose 10.8% to £1.1bn, driven by a recovery in the level of allowed revenue collection and the benefit of rising prices.

No recommendation - 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.

Prices delayed by at least 15 minutes

This article is more than 1 year old

It was correct at the time of publishing. Our views and any references to tax, investment, and pension rules may have changed since then.

Half year group revenue rose 10.8% to £1.1bn, driven by a recovery in the level of allowed revenue collection and the benefit of rising prices.

Profit before interest and tax rose 2.4% to £261.7m, as higher revenue was partially offset by higher energy costs. Finance costs rose £66.1m to £186.9m, largely a result of a non-cash increase in the value of index-linked debt due to inflation.

Free cash flow decreased from £161.3m to £133.9m, due to higher investment spend. Net debt increased from £6.2bn to £6.6bn.

Turnover guidance for the full year remains unchanged, with the Regulated Water and Waste Water businesses expected to deliver between £1.97-£2.02bn. The group's expecting to achieve a net reward of at least £50m on its outcome delivery incentives (ODIs).

The board has declared a 42.73 pence interim dividend, up 4.6%.

The shares fell 1.7% following the announcement.

View the Severn Trent share price and how to deal

Our view

Severn Trent is primarily a straight-forward water utility, providing water and sewerage services to over 4m customers in the Midlands and Wales. There are renewable energy and food waste recycling businesses tucked in there too - but their contribution to profits is minimal at present.

Water utility prices are set by the regulator, Ofwat. They're reviewed every five years and aim to make sure water is readily available at an affordable price. In return well run water companies can achieve reasonable financial returns.

Severn Trent has historically coped well under the system, delivering steady earnings growth and a gentle flow of dividends - characteristics which have made it a popular choice with pension funds and other income seeking institutions. This is particularly true considering the current, uncertain, economic conditions where reliable cash flows attract a premium.

Despite already offering some of the lowest prices around, the group's committed to doing more to help those impacted by the current cost-of-living crisis. The group's already helping 315,000 customers with heavy discounts on water bills and has launched a new 10-year programme hoping to move 100,00 people out of poverty.

However, there are challenges ahead.

Inflation in costs from power to chemicals mean costs are expected to rise. The group has a natural hedge against rising energy costs, with Bioresources and Severn Trent Green Power generating around half of the group's energy consumption.

A new regulatory regime which lasts until 2025 has moved the goal posts. Ofwat has reduced the financial returns water utilities can make and set challenging performance targets. As with most businesses, lower earnings tend to mean less generous returns for shareholders. Cue Severn Trent's recently updated dividend policy.

The goal is to grow the dividend at least in line with inflation (compared to 4% above inflation under the old regime). Above inflation growth isn't out of the question, but the pandemic has made operational outperformance and cost efficiencies (both of which can boost earnings) harder to achieve.

The balance sheet remained fairly stable, but higher inflation and interest rates mean the cost of debt servicing could creep up. Severn Trent's in a better position that most, though, with only 25% of debt linked to inflation compared to an industry average of 60%. For now, the cash interest rate payable on debt remains stable, but it's something to keep an eye on.

Despite headwinds, Severn Trent has some of the more reliable revenues out there, and a strong operational record. Such qualities are especially valuable when the world is so uncertain and the group trades at a premium to peers as a result. Remember though, nothing is guaranteed and share prices can fall as well as rise.

Severn Trent key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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 disclosure for more information.

Latest from Share research
Weekly newsletter
Sign up for editors choice. The week's top investment stories, free in your inbox every Saturday.
Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

Our content review process
The aim of Hargreaves Lansdown's financial content review process is to ensure accuracy, clarity, and comprehensiveness of all published materials
Article history
Published: 22nd November 2022