ii view: Severn Trent upgrades dividend amid jump in profit

First -half results to 30 September

• Revenue up 4.5% to £1.22 billion
• Adjusted profit (PBIT) up 17% to £298 million
• Interim dividend up 4.2% to 48.68p

Chief executive Liv Garfield said:

I'm proud of the performance our brilliant teams have delivered this year, whether for our customers, the environment or the wider region. 

“We have achieved our best ever leakage performance and we're very confident of keeping the highest 4* status from the Environment Agency for an unprecedented fifth consecutive year.

"We are planning record levels of investment in the coming years, while also keeping bills the second lowest in the country.”

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ii round-up:

Water company Severn Trent (LSE:SVT) today flagged results broadly matching City forecasts, but with interest due on debt for the year ahead now expected to fall marginally compared to management’s previous unchanged estimate.

First-half revenue to 30 September rose 4.5% to £1.22 billion, driven by price increases, helping to take adjusted profits up 17% to £298 million. A declared interim dividend of 48.68p, to be paid on 10 January to eligible shareholders, is up 4.2% year-over-year, in line with Severn’s current policy to match the increase in inflation. 

Shares in the FTSE 100 company rose 2% in UK trading having come into this latest announcement up around 4% year-to-date. That’s similar to fellow water company United Utilities Group Class A (LSE:UU.). The FTSE 100 index is up 5%. 

Severn Trent supplies over eight million people with around two billion litres of clean drinking water every day. Interest to be paid on group debt for the current full year, including for inflation linked bonds, is now forecast to come in at around £282 million, down from around £287 million previously. 

Group adjusted net debt as of the 30 September 2024 was £7.66 billion, leaving gearing at 58.6% versus 58.7% late March. 

The current five-year regulatory period, or AMP7, is due to end on 31 March 2025. Investment made over the period on new and existing assets such as pipes, treatment works and reservoirs totals over £6 billion. 

Draft proposals from the water regulator regarding requirements for AMP8 were received in July, with a final determination expected on 19 December. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the results, flagging Severn Trent as a ‘top pick.’

ii view:

Headquartered in Coventry, Severn Trent employs around 7,000. A constituent of the FTSE 100 index, its name comes from the two predecessor River Authorities which managed the catchment of the Severn and the Trent.

For investors, periodic negotiations with the industry regulator and pending new plans under AMP8 could potentially hinder Severn’s ability to make shareholder returns. Index-linked group debt has previously seen financing costs rise, pressuring earnings. Group net debt of £7.66 billion compares to a stock market value of £8.3 billion, while the water industry’s general accountability for the environment should not be overlooked. 

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To the upside, defensive qualities persist given the need for water no matter what state the economy might be in. Operational improvements and investment in group infrastructure are ongoing. Management summarises the group’s financial position as ‘resilient’, while some easing in debt interest financing has been seen. 

For now, and while regulatory risks cannot be ignored, a forecast dividend yield in the region of 4.5% is likely to keep income investors interested. 

Positives: 

• Attractive dividend payment (not guaranteed)
• Defensive qualities 

Negatives:

• Uncontrollable factors such as the weather can hinder performance
• Regulatory constraints

The average rating of stock market analysts:

Strong hold