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Severn Trent, swims against the tide!

Severn Trent, the biggest water company in Britain, next to United Utilities, in its recent trading update, announced that the decline in water usage by non-commercial customers had stabilized considerably. Hence this fall is expected to have a lesser impact on the revenues than anticipated .

The group said that its revenues will bear a brunt of around five to ten million pounds, very much lesser than an earlier estimated figure of fifteen to twenty million pounds. There was a sell-off amidst water sector stocks; Severn Trent fell 41 p to 11.46 pounds,United Utilities fell 16 p to 567 p.

 During the economic downturn, the usage of water by recession-hit commercial customers, met a sharp fall due to businesses stopping operations or cutting costs.

The business customers of Severn Trent comprised of the MFI retail chains as well as the high stores of the Woolworth , which have since become disfunct.   Other customers like Jaguar and Land Rover, the car manufacturers had their productions hit by recession.

About  twenty percent of the group revenue,accounted for by its industrial and commercial customers ,had been hit because of the low consumption of water in these industries as  a consequence of economic slowdown

The recent prolonged freezing weather conditions caused a rise in leakage, above the normal levels prescribed during winter. The water utility assured that the problem is dealt by extra resources brought in. The effect on annual performance of leakage is said to be too early to be evaluated, and will be measured after the year end post March. The extra cost of leakage repair would not materialize in the expenditure meant for total annual operations.

Severn Trent,  maintaining  a system of pipes of about 46,000 km, is one of the many water companies present which has to handle burst pipes due to the thaw.

When compared to the wavering economic backdrop,the defensive nature adopted by the group does remain attractive.

In spite of the dividend payment being rebased, a progressive policy should be eventually pursued. And the dividend payment continues to stay attractive in an environment with low interest.

The improvements seen in sewer flooding,customer complaints and safety issues have definitely encouraged the management to a great extent.The quality of water showed an increase of 23pc over the period of first half.

The capital disbursement for the entire year is forseen to be between 610 million pounds and 630 million pounds.With the shares currently yielding a good 6pc,the payout is definitely worth looking out for.

Bad debts to customer were conistent at  2.3pc turnover. Future developments would be monitored closely. Trading from the start of October was on par with expectations.

The midlands, including Birmingham and Nottingham and mi-Wales are supplied by Severn Trent. The group has its network stretching from the Bristol Channel ,over to the Humber.

The declining commercial usage is an issue that concerns many sectors and the regulator Ofwat presents a lot of uncertainity ,as the regulatory review is expected later this year.A harsher review is being expected by the management, because of the fast decrease in UK inflation,and this is another issue that it has to handle.A settlement with a lower-than-anticipated price may be in the offing.

However, the company has decided not to challenge the restrictions on pricing placed by Ofwat.

The company assured that it was on the path to make 30 million pounds of cost savings for the years 2008-09 and 2009-10