- Dividend increased in line with inflation
- Adjusted EPS up 36 per cent
Severn Trent (SVT) continues its costly infrastructure rebuild. Full-year investment is up, earnings are increasing, and its effective interest cost is falling, yet group chief executive Liv Garfield has been forced to defend her compensation package after sewage spills by the utility rose by a third in 2023.
In the year to March, it invested £1.2bn, a 63 per cent year-on-year increase, keeping it ahead of the AMP8 capital delivery program set by Ofwat. A £1bn equity raise enabled it to bring forward £450mn in investment, while increasing its cash balance and lowering its net debt. The investment has helped reduce leakage by 10.8 per cent and the company has hit its leakage reduction targets for the sixth year in row.
The overarching problem remains the elevated level of debt. Falling inflation means interest rate hikes seemed to have peaked, although a consequent rate cut has been pushed back until later in the year. Nonetheless, refinancing risks have dissipated and the fall in inflation is bringing down the interest payments on index-linked debt, which helped effective interest costs to fall by 150 basis points to 4.7 per cent.
Meanwhile, adjusted earnings increased 36 per cent to 79.4p. The adjusted figure removes deferred tax payments of £55.6mn. The increase came about due to the removal of the ‘super deduction’ policy, which allowed 130 per cent tax allowance on capital spending. This is now gone but the group has losses it can carry forward to offset future taxes.
The capital-intensive nature of the business is set against the fact that it is obviously in an effective monopoly position. But in an election year, political risks are rising as critics point to unsustainable debt levels and the perceived prioritisation of distributions over investment in its water network. With investment on the rise, the group's free cash flow yield is currently negative, and has rarely exceeded 2 per cent in the past decade. Stick to hold.
Last IC View: Hold, 2,674p, 23 Nov 2023
| SEVERN TRENT (SVT) | ||||
| ORD PRICE: | 2,664p | MARKET VALUE: | £7.97bn | |
| TOUCH: | 2,662-2,664p | 12-MONTH HIGH: | 2,846p | LOW: 2,243p |
| DIVIDEND YIELD: | 4.4% | PE RATIO: | 52 | |
| NET ASSET VALUE: | 613p | NET DEBT: | £7.31bn | |
| Year to 31 Mar | Turnover (£bn) | Pre-tax profit (£mn) | Earnings per share (p) | Dividend per share (p) |
| 2020 | 1.77 | 311 | 66.7 | 100.10 |
| 2021 | 1.83 | 267 | 89.1 | 101.58 |
| 2022 | 1.94 | 274 | -35.2 | 102.14 |
| 2023 | 2.17 | 168 | 52.7 | 106.82 |
| 2024 | 2.34 | 512 | 51.0 | 116.84 |
| % change | +8 | +205 | -3 | +9 |
| Ex-div: | 30 May | |||
| Payment: | 17 Jul |
