Severn Trent has slipped back despite a rise in profits, as investors await the outcome of the latest regulatory review.
Its shares are down 9p at £20.53 even though half year turnover rose 2.7% and underlying profits increased by 3% to £274.9m. It has lifted its interim dividend by 5.6%.
The company said it had invested another £247.9m in improvements for customers, while it has started a reorganisation which will lead to 500 job losses.
On bills, chief executive Liv Garfield said:
We are acutely aware that many of our customers are facing difficult times and we have kept our bill increases at or below inflation for five years running, as well as working hard to help customers who are struggling, though our range of social tariffs.
Crucially, it is looking ahead to December 12 when Ofwat will unveil its final proposals. Severn Trent said it had been disappointed with some of the initial recommendations, and had been continuing to talk to the regulator. It has two months to decided whether the final determination should be referred to the Competition and Markets Authority.
The outcome of the water sector review could also open the floodgates to further interest from predators, analysts believe. Angelos Anastasiou, utilities analyst at Whitman Howard, said:
Severn Trent’s first half figures are slightly ahead of our numbers but, as ever, we do not believe that the precise interim numbers are that significant, and we do not anticipate any major changes to our full year numbers.
That said, management says that Severn Trent has had a “good first six months”, with “financial results in line with expectations”, and we would tend to agree.
Of greater interest remains the outcome of the water price control review (PR14), with Severn Trent Water’s ) Final Determination due on 12 December. We would still anticipate a reasonable final outcome here, and the Water subsector’s takeover attractions remain over the medium term, especially following a satisfactory conclusion of PR14. Our target price of 2037p gives a total return of 3% at present levels, and we retain our hold recommendation; but as we indicated in our preview, crystallisation of a bid using historic premiums could lead to a significantly higher takeout price.
