Flush Severn Trent pitches higher spending plan

After endless criticism, leaking and creaking water companies have realised the way forward is to throw money at their infrastructure. This is only a slight update to the highly regulated operating model, but it has shifted the balance between capital spending, debt and dividends. 

Severn Trent (SVT), which covers an area stretching from the Cotswolds to Lincolnshire, has promised “transformational change” in its performance through higher spending. 

The next regulatory period, AMP8, runs from 2025 to 2030. Severn Trent said it was bringing forward £400mn from those plans into AMP7, in order to cut sewage spills. 

Debt levels are already high, so the company raised £1bn at the end of September, with a £500mn injection from the Qatar Investment Authority, which now holds 12 per cent of the utility. The company said its spending commitments were now funded to early 2026. 

Operating costs were up in the first half by £100mn, driven by higher energy, chemical and labour spending, as well as “a greater level of investment impacting infrastructure renewals expenditure and depreciation”, the company said. 

The regulated water and waste water division reported flat profit before interest and tax at £246mn. 

Interest costs on the huge debt pile were down from 6.4 per cent to 5.5 per cent, so net finance costs actually dropped despite net debt climbing from £7.1bn at the end of March to £7.5bn as of 30 September. Investec forecasts that net debt will fall again by the end of the financial year, to £6.8bn. 

Severn Trent shareholders are pleased with the plans – sending the share price up 15 per cent since the capital raise, even with the higher share count. We think its valuation is too high to buy in, however. Hold. 

Last IC View: Hold, 2,746p, 24 May 2023