Analysis of Severn Trent

7/29/2019 Analysis of Severn Trent

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Severn Trent Something

by Wiliam Bognar, Sin Sin Fong,

Samantha Kelsall and Eleni Stavridou

AcF.100 Managerial Finance

Group Report: Share Price Analysis, Summer 2009

Group 2B


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Executive Summary

The UK water industry is a key part of the economy

Severn Trent Plc is amongst the leaders of the industry

From 1st October 2009 to 19th March 2010, Severn Trent has seen a constant rise inshare price

However, it has experienced fluctuations due to conflicting opinions about the state of the

UK economy, which has affected investor confidence

On 19th January 2009, Severn Trent acceptance of Ofwats Final Determination proposal

lead to a large increase in share price

United Utilities and Northumbrian Water Group are key competitors to Severn Trent

Both have also seen growth over the period, along with the rest of the industry

However, both these two companies and the industry have been subject to price

fluctuations due to speculation about economic and industry-specific issues

Severn Trent would be the most recommended for investment, as its share price growth has

been continuous and steadier than that of the industry and of the FTSE 100 Index

However, Severn Trent is subject to both systematic and unsystematic risk, and so

investment would only be suggested if as part of a diversified portfolio

Introduction

The UKs water industry is one of the crucial components of the economy, as this service sector

is a dominant sector of the UK economy. It is dominated by a multitude of companies, though

we can identify three major players in this field. We will focus primarily on Severn Trent and

compare its share price performance with competitors Northumbrian Water Group and United

Utilities. By using graphs of share prices during the period between 1st October 2009 and 19th

March 2010 we will analyse how share prices have been influenced. We will begin by

introducing Severn Trent and analysing fundamental events which affected its share prices. We

will then compare Severn Trent with its two competitors, focusing especially on how their share

prices moved during the events. We will then analyse in detail the most important economic

event to affect share price trends and explore our findings in the Event Analysis.


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Company analysis

Severn Trent Plc is one of the principal companies in the UK and is a constituent of the FTSE

100 (tagged as SVT). It is one of the major water suppliers in the world with its main services

being water and waste-water solutions.

In the period between 1st October 2009 and 19th March 2010, the share price index of Severn

Trent showed an overall positive trend (see Fig 1), although it fluctuated in reaction to news in

the economy and changes in industry policies. We will analyse the most significant events

below.

At the end of September, David Miles, of the Monetary Policy Committee, made an update

regarding the Bank of Englands current policy of Quantitative Easing, which significantly

affected the share price of the FTSE 100 and Severn Trent. Fig 2 shows that, from 1st October,

share prices decreased, which stemmed from figures released that week showing how

households and firms had not experienced growth of credit or broad money supply from

Quantitative Easing (Symon, 2009). However, there was a dramatic increase after 5thOctober,

possibly due to an acknowledgement of support for Quantitative Easing policies by opposing

parties of the government and overall agreements on its success (Smith, 2009).

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Fig 1 - SVT share price from 1st October to 19th March

SVT


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On 4th November, the European Commission reported a positive outlook for the future of the

UK economy by predicting that the economy would see growth up to 1.9% in 2011, despite

recent shrinking in 2009. This forecast seemed to increase confidence in the economy and

share prices for Severn Trent (see Fig 3) and FTSE 100 (see Fig 4) gradually increased over

time.

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Fig 2 - SVT share prices from 1st 2 weeks of October,showing upward sloping share price trend from the 5th

October

SVT

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Fig 3 - SVT share price for November 09, showing positivetrend throughout month

SVT

4 Nov 09

1 Oct 095 Oct 09


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On 11th December, Severn Trents share prices increased from 1045p to 1047p on the 14th

and 1073p on 15th December (see Fig 5). Additionally, the share price for FTSE 100 also

shared a price leap from the 15th to 16th December (see Table 1). A reason for this was that

the Bank of England's chief economist, Spencer Dale, announced better than expected views

for future employment, which further restored faith in the economys improvement (Business

Spectator, 2010).

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Fig 4 - FTSE 100 Index share price for November 09,showing positive trend throughout month

FTSE 100

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Fig 5 - SVT share price from 8th to 24th December,showing share price leap

SVT

4 Nov 09

14 Dec 09

15 Dec 09


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Table 1 - FTSE 100 Index for 14th to 16thDecember 2009 (Yahoo Finance, 2010)

Date Closing share price

16/12/2009 5320.3

15/12/2009 5285.8

14/12/2009 5315.3

More fluctuations occurred at the start of February 2010 when share prices for Severn Trent

decreased after peaking on 1st February. The FTSE 100 index also decreased on the 4th, but

changed its course and started rising on the 5th until 24th February. This was due to a lack of

confidence in the economy caused by new predictions from economists about future increases

in interest rates and higher than expected levels of unemployment (The Evening Standard,

2010).

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Fig 6 - SVT share price from 1st to 24th February 2010showing share price fluctations

SVT

1 Feb 10

5 Feb 10


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Competitor analysis

Northumbrian Water Group, a constituent of the FTSE 250 (tagged as NWG), is a provider of

water and sewerage services in the North East of England. United Utilities Group is a holding

company primarily engaged in the provision of wastewater and water services through itssubsidiaries and is a constituent of the FTSE 100 (tagged as UU).

Although they both operate as utilities, along with Severn Trent, these companies also provide

different ranges of private services and products. Northumbrian Water Group offers plant and

vehicle leasing services, United Utilities provides infrastructure management services and

Severn Trent offers pipeline rehabilitation and repair services. As a result, the three companies

are large operators in the industry and compete closely, but also are differentiated from their

competitors in specific areas.

The companies operate in different regions of the UK, as Fig 7 shows. This allocation of regions

creates competitive differences.Fig 7 Map of areas where national water suppliers operate

(CON29DW Drainage and Water Enquiry)

The size of the companies is another important difference that separates them. Table 2 below

shows how the three companies compare in terms of size and overall performance.


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Table 2 Performance and infrastructure data for three water suppliers, 2008 (FAME, 2010)

Company

name

Year Turnover GBP Profit for the

period

Profit Margin Solvency ratio Number of

Employees

Rank Rank Rank Rank Rank

United

Utilities Water

2008 1,508,200 4 373,500 1 33.48% 1 22.81% 1 3,925 5

Seven Trent

Water

2008 1,324,900 5 164,000 4 21.25% 7 19.17% 3 5,624 2

Northumbrian

Water

2008 694,100 9 -12,700 9 22% 6 6.57% 11 3,174 8

Out the three companies, Northumbrian Water Group is the smallest, with a share price of

about 270p, 3100 employees and a turnover of almost 700,000. On the other hand, Severn

Trent is the leading company in terms of turnover, employees (almost 9000) and share price

(about 1150p). Yet United Utilities leads the rankings in terms of profit margin, solvency ratio(22.81% considered financial healthy) and profit for the period. By having competitors of

contrasting sizes, we can see how far the influence of economic and industry factors reaches

between the larger and smaller companies.

In order to compare share price fluctuations for our companies, we will also plot the

performance of the industry as a whole by putting together the share prices of the main utilities

companies from FTSE 100 and obtaining an average share price. This is the same as having a

industry portfolio, with equal investment in each of these companies. Fig 8 shows that the

evolution of the industry from our portfolio between 1st October 2009 and 19th March 2010

can be described as having an upward trend, similar to the FTSE 100 index (see Fig 9), but

with less fluctuations and with a more pronounced increase.

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Fig 8 - Industry 'portfolio' share price from 1st October2009 to 19th March 2010 showing overall upward trend

Industry


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During these months, Severn Trent and its competitors experienced an overall increase in the

share price, along with overall share price patterns in the industry. The water supply sector was

affected mostly by two major events in this period.

On 24th October, Ofwat, the economic regulator of the water and sewerage sectors in England

and Wales, announced its Final Determination for all the companies to accept. This was

Ofwat's proposals of price limits for the water companies for the period 2010 to 2015. Positive

public response to the news that the average water bill in England and Wales will be the same

today as it is in 2015 (Andrews, 2010) lead to an increase in the industrys performance on the

stock exchange, along with the individual three companies.

Secondly, on 31st January, the water supply industry was influenced by speculation that

Ontario Teachers Pension Plan was planning to acquire full ownership of Northumbrian Water

Group (Ontario Teachers Pension Plan, 2010). Northumbrian Waters share prices rose, asMyles Neligan observed:

Shares in Northumbrian were trading at 289.5p at 4.11pm, up 11.9%. Shares in the

other two listed UK water companies, United Utilities and Severn Trent, were also up

between 2.8% and 3.8% (Reuters, 2010).

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Fig 9 - FTSE 100 share price index from 1st October 2009to 19th March 2010 showing overall upward trend

FTSE 100


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Event analysis

A major event for Severn Trent occurred when the company accepted Ofwat's Final

Determination regulations for 20102015 on 19th January. Severn Trent share prices showed

a gradual increase up to that date, following the pattern of the industry, with prices fluctuatingaround 1090p. Accepting this proposal meant Severn Trent had to cut the dividends by

approximately 10% in the first year of the five year period to meet the requirements of the

proposal. The company said the Final Determination was "tough, but it was able to meet the

required outputs (Severn Trent, 2010). However, despite the cut, investors in the market did not

react in a negative way, as our analysis in Fig 10 shows. After the acceptance, the share price

rose 3.1% that day and continued over the following days with a steady rise up to 1170p on 2nd

February, only slightly shadowed by a fluctuation between 22nd to 29th January. The FTSE

100 index has a contrasting downward trend over the same period (see Fig 11), which

highlights Severn Trents success from this event.

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Fig 10 - SVT share price from 4th January to 4th February2010, showing positive trend on 19th January

SVT

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Fig 11 - FTSE 100 Index share price from 4th January to4th February 2010 showing overall negative trend

FTSE 100

19 Jan 10


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The industry also experienced an upward trend in share prices from events which proved

favourable for share price performance during this period (see Fig 12), as seen in particular

with Northumbrian Water and United Utilities.

Northumbrian Water experienced a fairly constant share price evolution up until 22nd January

when the rumour was launched that Ontario Teachers' Pension Plan (who hold 27% of

Northumbrian Water's shares) was planning a takeover bid for 1,700 million (Marketline,

2010). Its share price rose drastically the next day, from 258.6p, recorded on 29th January, to

289p on 1st February (see Fig 12).

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Fig 12 - Industry 'portfolio' share price for 4th January to 4thFebruary showing an overall positive trend over the period

Industry

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Fig 12 - NWG share price from 4th January to 4th February2010, showing sharp price increase from 2nd February

NWG

1 Feb 10

4 Nov 09

29 Jan 10


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United Utilities also enjoyed an upward trend in this period, as Severn Trent Waters

acceptance of the Final Determination occurred when United Utilities released its Interim

Management Statement and accepted its own Final Determination. As a result, a smaller-

than-expected dividend cut was all that was necessary to deal with the consequences of

Ofwats pricing restrictions (Gray, 2010). The share price immediately began rising from

503.5p on 19th January to 551.5p on 1st February.

We have seen that Severn Trent Waters and its competitors all experienced some major

changes during this period. This had a positive influence on the water supply sector as a whole.

However, these trends were not always seen in the FTSE 100, which had a decreasing trend

throughout this period, showing that these particular events were significant and were

influenced by outside economic factors.

Conclusion

From our analysis, we realised that the changing state of the UK economy had significant

influence over the index of share prices. We conclude that Severn Trent is the leading company

among these three companies, as we have observed an overall constant growth throughout the

period we have studied. We found that Severn Trent is subjected to both systematic risk

(interest rate speculation) and unsystematic risk (Ofwat's Final Determination, rumours of the

Northumbrian takeover). Consequently, we would suggest an investor should consider buying

Severn Trent stocks only if he or she has a diversified portfolio, so that investments are only

subjected to macroeconomic factors, and not to changes affecting the water supply industry.

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Fig 13 - UU share price from 4th January to 4th February2010, showing general increase from 19th January

UU

19 Jan 10

1 Feb 10


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Reference list

Andrews, A. (2009), Ofwat Says Water Bills Will be Flat for Next Five Years, Wics to Cut by

5 Per Cent, Utility Week, 24/11/2009.http://www.utilityweek.co.uk/news/uk/water/sign-up-to-

get-live-updates-fr.php[Accessed: 12/03/2010]

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ompanies+in+uk&cd=5&hl=en&ct=clnk&gl=uk&client=firefox-a[Accessed: 13/03/2010]

The Evening Standard, Interest Rates Will Surge to 6.5% by 2015, Barclays Says,

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will-surge-to-65-percent-by-2015-barclays-says.do[Accessed: 10/03/2010]

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2010420/home.serv?product=fameneo&loginfromcontext=ipaddressFrom Home Page/Search

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Gray, A. (2010), Dividend surprise at United Utilities, Financial Times, 22/01/2010.

http://cachef.ft.com/cms/s/0/343910b6-06ee-11df-b058-00144feabdc0.html[Accessed:

15/03/2010]

Marketline (2010), Ontario Teachers Pension Plan may acquire remaining 73% of

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http://www.marketlineinfo.com/library/FinancialDeal.aspx?R=FD323171[Accessed: 15/03/2010]

Monaghan, A. (2009), UK Recovery Will Outstrip EUin 2010 and 2011, The Daily

Telegraph, 04/11/2009. p.2

Neligan, M. & Roumeliotis, G. (2010), Northumbrian Shares Jump on Fund Takeover

Report,Reuters, 01/02/2010.

http://uk.reuters.com/article/idUKTRE6102Y620100201?pageNumber=1&virtualBrandChannel=

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Ontario Teachers Pension Plan (2010), Teachers Statement re: Northumbrian Water

Group Plc, Ontario Teachers Pension Plan.

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Telegraph, 01/10/2009. p.40

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Analysis of Severn Trent

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