Severn Trent sees water demand rebound but eyes bad debts

As the market swings away from high-growth shares, it’s hard to get much more appealing in this environment than a water utility. Severn Trent (SVT) even links its dividends to the inflation measure that includes housing costs, although this lags the current figure as the November level of 4.6 per cent will be used for the coming financial year. 

Severn Trent, which acts as water supplier for an area stretching from the Cotswolds to Lincolnshire, said the year to 31 March had seen water demand return to pre-pandemic levels because of increased business activity. However, it did flag the risks around ‘water poverty’ and has held onto its Covid-19-era provisions for bad debts, of £8.5mn, in light of risks from the cost of living crisis.

In the last financial year, the adjusted profit before interest and tax for the regulated water and waste water division was up 5 per cent, to £476mn, on the back of higher turnover and a £16mn drop in bad debt write-offs, even as labour and energy costs rose 6 and 14 per cent, respectively. The bottom line was hit by deferred tax liability caused by the planned 2024 increase in the corporate tax rate, as outlined in the half-year results. 

Severn Trent is coming to the midpoint of the 2020-25 regulatory period, and hit £604mn in net capital investment in the year. This figure is expected to be between £575mn and £675mn in the current financial year, weighted to the second half. 

We moved Severn Trent from hold to buy in November, as inflation looked set to take hold. While pricier now – trading at a forward price-to-earnings ratio of 26 times against a five-year average of 18 times – it is still worthwhile as a stable portfolio addition. Buy. 

Last IC View: Buy, 2,822p, 23 Nov 2021