Severn profits in deep water

12 April 2012

WATER giant Severn Trent spooked investors, telling them they should not automatically expect falling profits at its highly-regulated British water and sewage business to be made up from growth in its waste disposal and US technology businesses.

Executives, however, were said to be dismayed when its statement made to today's annual meeting was taken as a profit warning by City traders, who immediately marked the shares down 9%.

The company, headed by one of New Labour's favourite businessmen David Arculus, sometime donor to the party and its new Red Tape czar, said in a statement to the Stock Exchange: 'We said at the announcement of our year-end results on 11 June that, overall, the group is likely to experience a challenging year in 2002-03.

'Shareholders should not assume that the inherent profit reduction for Severn Trent Water in 2002-03, which reflects its broadly unchanged prices, can be made up by the performance of the rest of the group.'

Dealers took the view that Severn Trent was highlighting continuing problems in its US businesses, which recorded a 16% fall in profits to £32m in the year to March, and that its market-leading waste management business Biffa was struggling in the current British economy. Biffa showed a 60% rise in profits to £73m last time but those figures were flattered by the acquisition of UK Waste.

The group's high-margin laboratory testing services, which analyse groundwater samples or contaminated land, have been hit by a drying-up in Federal funding and what Severn Trent said is the lower priority being given to environmental protection in the US. A spokesman for the group said, however: 'We are re-emphasising what we made quite clear at the results in June. We are updating by restating.'

Shares in Severn Trent, regarded as a bastion of defensive stocks in these days of volatile equity markets, have dived more than 20% since its results, wiping more than £500m off the value of the company.

The shares, off 31 1/2p in later trading at 620p, are trading at a two-and-a-half-year low. Its profits from UK water are being hit because its price settlement means it cannot raise customer charges while at the same time having to invest in capital expenditure.

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