Severn Trent shines with early performance rewards

(by Verity Mitchell)

Severn Trent reported early success in earning a financial reward of £87m for its performance for the financial year to March 2026, and predicted a further £50m in the current year. This will be an achievement most of the other companies are unlikely to match so early in AMP8. Severn Trent also reaffirmed its target of £300m of regulatory rewards over the five year period.

Pollution incidents fell by 35%, leakage by 5% and sewer flooding events by 12% (although all companies will have also benefited from fewer storms compared to the prior period).

Operational leverage and competitively-priced debt allowed the company to grow earnings per share by 64.5% to 184.4p, compared to revenue growth of 16.6%. Management cited process improvement, productivity and ‘no dig’ techniques for below-ground assets as reasons for strong earnings growth. With a dividend per share increase to 126p in line with its inflation-linked policy, this resulted in a 68% payout rate.

It appears that financial capacity is closely linked to outperformance. Severn Trent’s £1bn equity raise in 2023 allowed it to begin to plan and spend for the regulatory challenges early. With insourcing, standardisation and galvanising the supply chain, the company has earned regulatory rewards much earlier than financially constrained companies – some of which have only attracted new equity capital in the last 12 months.

An earnings upgrade for 2028, from 224p to 250p, will also have pleased investors, together with an indication of faster regulated asset growth from price re-openers.

What is less clear is the extent of extra growth the company could generate. Management confirmed that £600m has been requested in the first phase of re-openers, over and above the £15bn in its current plan. United Utilities’ management used the 3% additional regulated asset growth from a programme of these over AMP8 as the pretext for raising £800m of new equity earlier in May. The extent of Severn Trent’s ambition to grow faster through this mechanism in the five year period, and how this accelerated asset growth might be funded, remains unknown. The company reported a regulated debt metric of 63.6% and expected Regulatory Capital Value Compound Annual Growth Rate to be 10% to 2030, excluding any re-openers.

With returns on regulatory equity now 6.3% above base at 11.6%, excluding the positive effect of indexation, and an Environmental Performance Assessment 4-star rating expected for an unprecedented seventh year, Severn Trent continues to shine.