Severn drives efficiencies though 'rewards' could fall in 2017-18

Severn has now achieved efficiencies of £610m, from £490m at the last half year update. An additional £100m of efficiencies have been identified, bringing the target to £770m to be locked in by the time the current asset management period - known as AMP6 - ends in 2020. As part of its drive to strip out costs, the group disposed of its Italian operating services business and its non-household retail operation. It also generated an exceptional gain of £16.6m following a pension increase exchange exercise carried out during the year.

The group earned a £47.6m reward on its customer outcome delivery incentives (ODIs), which was attributed to increased investment and a milder winter. The group's strongest performances were in detecting coliform bacteria, minor (category three) pollution incidents and external sewer flooding. It is beating targets by more than 20 per cent in each of these three areas, although it fell 32 per cent behind target in dealing with water quality complaints. Severn has been investing in innovative technology and new processes to improve operational performance in this area.

Finance director James Bowling warned the level of reward was likely to fall in 2017-18 to around £23m, accounting for tougher targets, the potential for less clement weather and fewer "deadbands", performance levels where neither a penalty nor reward is given.

The strengthening performance prompted management to introduce a dividend policy equivalent to the growth of the retail price index (RPI) plus 4 per cent until the end of AMP6. This puts the proposed dividend for next year to 86.6p, offering a yield of 3.5 per cent at the current share price.

Prior to these figures, JPMorgan Cazenove gave adjusted pre-tax profit of £312m for the March 2018 year-end, leading to EPS of 109p, against £308m and 107p in FY2017.