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

Company overview

The Group's core activity is the supply of water and sewerage services.

HL Comment (23 September 2008)

The group’s website notes that Severn Trent supplies nearly two billion litres of drinking water per day to over three million households and businesses. Water is supplied via a network of around 46,000 kilometres of pipes and subsequent waste is then processed by over 1000 sewage works. Customers are located from the Bristol Channel to the Humber and from mid-Wales to Rutland.

Following a period of major corporate change, both the laboratory testing and Biffa waste management businesses have now been sold, bringing the group back to its former core business of water. The group’s full year results back in early June (2008) saw further profit progress being made, with pre-tax profits before exceptional items climbing by 16pc to £292.2m. Progress was aided by allowed price increases, sanctioned by the regulator, whilst the total dividend over the course of the full year was raised by 6.8pc. More recently (23Sept08), a trading update from the group suggested that current full year profit estimates should be met, although continued volatility in chemical and other commodity prices did provide some cause for concern.

On the negative side of the equation for investors, volatile energy and chemical prices are making day-to-day management of the business that much more difficult – given their potential impact on costs. Furthermore, the coming regulatory pricing review may not prove to be as kind to the company as previous reviews. On the positive, uncertainties in relation to potential fines relating to earlier discrepancies in leakage data have now been resolved. In addition, the group’s defensive nature remains attractive when set against an uncertain economic backdrop and the dividend payment currently provides strong support. On balance, market consensus opinion is currently neutral in tone.

All yield figures are variable and not guaranteed.

Fundamental Data

* Prior to 31st March 2005, figures were stated under UK Generally Accepted Accounting Principles (GAAP). Recent figures stated under International Financial Reporting Standards (IFRS).