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

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 in share 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.

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.
Fig 1 - SVT share price from 1st October to 19th March
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1183

1133

Share price

1083

1033

983

933

Date

SVT

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 5th October, 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).

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

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Share price

965

1 Oct 09
960 955 950

5 Oct 09

Date

SVT

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.
Fig 3 - SVT share price for November 09, showing positive trend throughout month
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Share price

1000 980

4 Nov 09
960 940 920 900

Date

SVT

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

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4 Nov 09

Date

FTSE 100

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

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14 Dec 09
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1000 08/12/09 10/12/09 14/12/09 16/12/09 18/12/09 22/12/09 24/12/09 SVT

Date

Table 1 - FTSE 100 Index for 14th to 16th December 2009 (Yahoo Finance, 2010) Date 16/12/2009 15/12/2009 14/12/2009 Closing share price 5320.3 5285.8 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).
Fig 6 - SVT share price from 1st to 24th February 2010 showing share price fluctations
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1 Feb 10
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Share price

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Date
SVT

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 its subsidiaries 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.

Table 2 Performance and infrastructure data for three water suppliers, 2008 (FAME, 2010)
Company name Year Turnover GBP Profit for the period
Rank 373,500 164,000 -12,700 1 4 9 33.48% 21.25% 22%

Profit Margin

Solvency ratio

Number of Employees
Rank 3,925 5,624 3,174 5 2 8

Rank United Utilities Water Seven Trent Water Northumbrian Water 2008 2008 2008 1,508,200 1,324,900 694,100 4 5 9

Rank 1 7 6 22.81% 19.17% 6.57%

Rank 1 3 11

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.

Fig 8 - Industry 'portfolio' share price from 1st October 2009 to 19th March 2010 showing overall upward trend
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Share price

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Date

Industry

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

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Date

FTSE 100

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, as Myles 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).

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 fluctuating around 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.

Fig 10 - SVT share price from 4th January to 4th February 2010, showing positive trend on 19th January
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Share price

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19 Jan 10

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

Share price

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FTSE 100

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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.

Fig 12 - Industry 'portfolio' share price for 4th January to 4th February showing an overall positive trend over the period 560 550 540 530 520 510 500 490 480

4 Nov 09

Share price

Date

Industry

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).

Fig 12 - NWG share price from 4th January to 4th February 2010, showing sharp price increase from 2nd February
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Share price

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29 Jan 10

Date

NWG

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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 smallerthan-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.

Fig 13 - UU share price from 4th January to 4th February 2010, showing general increase from 19th January
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Share price

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UU

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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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-toget-live-updates-fr.php [Accessed: 12/03/2010] CON29DW Drainage and Water Enquiry (2010), [Image]. http://209.85.229.132/search?q=cache:7VTw56gdnT4J:www.drainageandwater.co.uk/+water+c 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, 04/02/2010. http://www.thisislondon.co.uk/standard-business/article-23802401-interest-rateswill-surge-to-65-percent-by-2015-barclays-says.do [Accessed: 10/03/2010] FAME (2010), Search by Company name, FAME. https://fame2.bvdep.com/version2010420/home.serv?product=fameneo&loginfromcontext=ipaddress From Home Page/Search by Company Name/ Enter 'Severn Trent'/Search/ Enter ' United Utilities '/Search/ Enter ' Northumbrian Water '/Search/ [Accessed: 14/03/2010] 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 Northumbrian Water Group, 31/01/2010. http://www.marketlineinfo.com/library/FinancialDeal.aspx?R=FD323171 [Accessed: 15/03/2010] Monaghan, A. (2009), UK Recovery Will Outstrip EU in 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= 11700 [Accessed: 13/03/2010] Ontario Teachers Pension Plan (2010), Teachers Statement re: Northumbrian Water Group Plc, Ontario Teachers Pension Plan. http://www.otpp.com/wps/wcm/connect/otpp_en/home/newsroom/news+releases/2010/teachers +statement+re+northumbrian+water+group+plc [Accessed: 12/03/2010]

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Ross, S. (2010), Quantitative Easing Policy is Working for the UK Economy, Belfast Telegraph, 01/10/2009. p.40 Severn Trent (2010), 'Severn Trent Plc Statement Re: Ofwats Final Determination for the Period 2010-2015, Severn Trent. http://www.severntrent.co.uk/server.php?show=ConWebDoc.556 [Accessed: 14/03/2010] Smith, D. (2010), Its Time for Osborne to Lift the Tory Veil, The Sunday Times), 04/10/2009. p.4 Yahoo Finance (2010), FTSE 100 - Historical Prices Yahoo Finance. http://uk.finance.yahoo.com/q/hp?s=%5EFTSE&b=14&a=11&c=2009&e=16&d=11&f=2009&g= d [Accessed: 09/03/2010]

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