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Severn Trent rewards up, but targets are getting tougher

The water company has been rewarded for outperforming its regulatory targets
May 25, 2016

With the reduction in regulated prices well flagged, the decrease in Severn Trent 's (SVT) turnover last year is unsurprising. The good news for investors is the progress management has made in delivering efficiencies in line with its business plan for the current regulatory period, which runs from 2015 to 2020.

IC TIP: Hold at 2284p

Regulator Ofwat's outcome delivery incentives (ODI) model entices companies to outperform the allowed regulatory return via penalties and rewards. Severn Trent generated £23m in real rewards through measures including tighter cost control and reducing leakages, pollution and flooding. This is ahead of the £15m indicated in the group's February trading update.

The water group is making good progress on reducing its costs. Its labour bill was 9 per cent lower for the core regulated water and wastewater business at £135m, following a reorganisation of operations last year. Management also took advantage of low interest rates to increase the proportion of its debt at floating rates, reducing finance costs by £31m to £209m.

Management expects to deliver £670m in total expenditure efficiencies across the current regulatory period, equating to £260m in outperformance against its targets. Management plans to reinvest £120m in improving services for customers.

Prior to these results, analysts at Whitman Howard were expecting adjusted pre-tax profit for the year to March 2017 of £302m (from £314m in FY2016), giving EPS of 102.5p.

SEVERN TRENT (SVT)

ORD PRICE:2,284pMARKET VALUE:£5.38bn
TOUCH:2,283-2,284p12-MONTH HIGH:2,295pLOW: 2,009p
DIVIDEND YIELD:3.5%PE RATIO:16
NET ASSET VALUE:432pNET DEBT:474%

Year to 31 MarTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20121.771577370.1
20131.832009175.85
20141.7631919980.4
20151.801484884.9
20161.7932214080.66
% change-1+118+190-5

Ex-div: 16 Jun

Payment: 22 Jul