Finance costs water down Severn Trent's profits

In a year where water utilities faced much higher scrutiny of their dumping of sewage, worry over supply during a very hot summer and a generally tougher operating environment, Severn Trent (SVT) has made it through in good enough health so far.

The utility, which covers an area stretching from the Cotswolds to Lincolnshire, did see a hit from higher financing costs, which were up £66mn on last year. It took on £400mn in new debt in the six-month period as well. The impact on adjusted earnings per share was significant – these fell by almost half to 29.9p. 

At the same time, net labour costs dropped due to a pension scheme recalculation, while power costs jumped 75 per cent to £96mn. This was mitigated by using sewage sludge and food waste to generate electricity. Severn Trent also owns other renewable energy assets. 

As a consumer-facing operation, inflation will be folded into bills, and regulator Ofwat last week confirmed its decision to allow Severn Trent to add £102mn to bills next year as a marker of good performance. Southern Water and Thames Water, by contrast, had to hand back a combined £80mn for “missed targets on water treatment works compliance, pollution incidents and internal sewer flooding across 2021-22”. Good stewardship is positive for shareholders, too – Severn Trent wants to reduce its “combined sewer overflow activations” to 20 a year by 2025. The utility did not give a number on this for the half year, but said the low rainfall meant “activation levels were particularly low for the first half of the year”. 

The company is increasingly expensive on a forward PE basis even as its share price has declined because analysts have cut earnings forecasts for next year (consensus adjusted EPS was 116p six months ago and 62p now), but we think it is still a worthwhile addition. Buy.

Last IC View: Buy, 3,106p, 25 May 2022