ii view: Severn Trent rallies despite political cloud

Despite all the noise around the General Election, investors still like Severn Trent.  

Half-year results to 30 September 2019

• Revenue up 3.2% to £910 million
• Adjusted profit down 4.3% to £286.3 million
• Net debt up 2.1% from late March to £5.96 billion
• Interim dividend up 7.2% to 40.03p per share

Chief executive Liv Garfield said:

"Operationally we have made further progress over the last six months, with leakage, supply interruptions and water quality complaints all improving while delivering important environmental improvement schemes. We have continued to offer the lowest bills in the country while also investing for the long term, including in our biggest ever capital project, the £300 million Birmingham Resilience Programme, which is on track for completion by the end of the AMP. At the same time, we have worked hard to be in the best possible shape for the next five years. "

ii round-up:

Severn Trent (LSE:SVT) is a regulated water and sewage company operating in England and Wales. 

Along with water, it also operates a business services division, with interests in green power, property development and water operating services, whose customers include the MOD and the Coal Authority.

In these half-year results, Severn reported a decline in profit due to increased investment in infrastructure renewals, a property sale gain made in the prior year and the deferral of industry regulator incentives known as Outcome Delivery Incentives (ODIs). 

ODIs are paid to water companies by the regulator Ofwat for meeting or exceeding targets like project completions and standards of customer service. Severn continues to expect full-year ODI payment of at least £25 million net given current performance. 

Adjusted profit for its regulated water business retreated by 3.1% to £260 million, while at the Business services division it fell by 20% to £29.9 million. 

A 7.2% increase in the dividend payment was in line with its inflation linked policy under the current 2015-2020 regulatory period known as AMP6 (Asset Management Plan). 

ii view:

Severn Trent, like utility companies in general, is viewed as highly defensive. After all, no matter what the state of the economy, people will always need water and power. As such, and given their dependable cashflows from bill paying customers, their dividend paying abilities have become highly prized, particularly in this era of ultra-low interest rates. 

For investors, a forecast yield of around 4.4% remains attractive. However, there are risks. The regulator's new AMP7 is on the horizon and, with utility companies generally in the political firing line for poor service and value for money, the bar could be raised. Concerns about nationalisation of utilities at an unknown price under a potential Labour government also warrant serious consideration. 

Positives: 

• On track to hit its leakage target for the eighth time in nine years
• Attractive dividend payment
• Targeting £100 million of property profit over the 10 years to 2027 - £33 million delivered to date

Negatives:

• Could be nationalised at an unknown price
• Borrowing or gearing is higher than rivals
• Uncontrollable factors, such as the weather can hinder performance

The average rating of stock market analysts:

Hold