Severn's call for overhaul of water industry

The group, which serves more than eight million customers from the Bristol Channel to the Humber, recently warned water bills could jump as much as 27 per cent above inflation in the next 20 years without an overhaul of an "unsustainable" UK water industry.

Severn has been the leading advocate of reforms for the industry, calling for changes to policy, regulation and company behaviour.

"There is a growing consensus that the current policy and regulatory framework of the industry needs to evolve," said Severn chief executive Tony Wray.

Richard Flint, chief executive of Yorkshire Water, recently called for a relaxation of regulations surrounding mergers and acquisitions in the water sector to improve the long-term prospects of the industry.

Mr Flint said well-run water companies could take over poorly performing firms in other parts of the country for the benefit of customers and the industry as a whole.

Among Severn's pleas are "flexible" implementation of European Union directives, improved price-setting and water trading to save costs and increase competition.

Meanwhile, Severn said its focus on cost cuts helped it beat market expectations, with underlying profits rising to 338.4m for the year to the end of March.

The group invested 36.2m on restructuring and process improvements. This will help deliver annual cost savings of 13m.

Savings included cutting the number of back office posts by 275 as it moves to a new central office in Coventry.

It accelerated efficiency programmes during the second half of the year, including the launch of a new IT system which went live in December.

During the year it also invested 644.8m in fixed assets and

maintaining its network of 46,000km of pipes.

Turnover in the water subsidiary increased by 4.6 per cent to 1.38bn following price rises permitted by regulator Ofwat. The decline in consumption, in part due to the recession as customers cut water use, stabilised during the year but still knocked 3.5m from annual turnover.

However, Severn reported an increase in bad debts of 3.3m, rising to 2.5 per cent of turnover at 35m.

"We were not immune to the economic stresses that our customers and markets were experiencing," said the group.

The group said it has tightened its debt management and is using the Government's Water Direct scheme, which takes payments directly from customers' benefits. As a result, its debtor days performance improved to 32.6 days from 33.1, although it now finds it harder to recover debts over a year old.

Severn said customer service levels showed further improvement, while for the third year running it achieved its leakage target, despite the coldest winter for 30 years.

More than 100,000 customers signed up for its online account system, and it saw a 23 per cent drop in written complaints.

The group's services arm was also hit by the tough economic climate, but delivered growth and expanded in the UK and US.

Its water purification division saw projects deferred but ended the year with a record $100m order book. Contracts included a $7m reverse osmosis plant to purify sea water for an oil refinery in Pakistan and a deep bed filtration system in Libya.

Analytical services streamlined during the year and it began a new 10-year contract with Yorkshire Water.

The group upped its full-year dividend by 7.4 per cent to 72.32p.

View of the analysts

Analysts at Ambrian Capital said Severn Trent's results could lead to modest upgrades in its estimates for future years and estimated a yield of 5.6 per cent.

"Given this starting yield and the safe, steady outlook of the water sector over the next five years, coupled with 23 per cent upside to our target price of 1,422p, we reiterate our buy recommendation," said Ambrian.

Analyst Lakis Athanasiou at Evolution Securities said its share price performance is likely to remain constrained until it gives clarity on its 2011-15 dividend policy.

"The share price is supported by beneficial inflation environment and market worries on additional political, fiscal and monetary risk," he said. "In the mean-time the strong operational expenditure efficiency gains shown this year will support the share price."