Date post: | 14-Apr-2018 |
Category: |
Documents |
Upload: | wiliambognar |
View: | 223 times |
Download: | 0 times |
of 14
7/29/2019 Analysis of Severn Trent
1/14
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
7/29/2019 Analysis of Severn Trent
2/14
2
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 inshare 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.
7/29/2019 Analysis of Severn Trent
3/14
3
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.
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 5thOctober,
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).
933
983
1033
1083
1133
1183
1233
Sharep
rice
Date
Fig 1 - SVT share price from 1st October to 19th March
SVT
7/29/2019 Analysis of Severn Trent
4/14
4
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.
950
955
960
965
970
975
Sharep
rice
Date
Fig 2 - SVT share prices from 1st 2 weeks of October,showing upward sloping share price trend from the 5th
October
SVT
900
920
940
960
980
1000
1020
1040
1060
Shareprice
Date
Fig 3 - SVT share price for November 09, showing positivetrend throughout month
SVT
4 Nov 09
1 Oct 095 Oct 09
7/29/2019 Analysis of Severn Trent
5/14
5
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).
5000
5050
5100
5150
5200
5250
5300
5350
5400
Sharep
rice
Date
Fig 4 - FTSE 100 Index share price for November 09,showing positive trend throughout month
FTSE 100
1000
1020
1040
1060
1080
1100
08/12/09 10/12/09 14/12/09 16/12/09 18/12/09 22/12/09 24/12/09
Sharep
ric
e
Date
Fig 5 - SVT share price from 8th to 24th December,showing share price leap
SVT
4 Nov 09
14 Dec 09
15 Dec 09
7/29/2019 Analysis of Severn Trent
6/14
6
Table 1 - FTSE 100 Index for 14th to 16thDecember 2009 (Yahoo Finance, 2010)
Date Closing share price
16/12/2009 5320.3
15/12/2009 5285.8
14/12/2009 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).
1110
1120
1130
1140
1150
1160
1170
1180
Sharep
rice
Date
Fig 6 - SVT share price from 1st to 24th February 2010showing share price fluctations
SVT
1 Feb 10
5 Feb 10
7/29/2019 Analysis of Severn Trent
7/14
7
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 itssubsidiaries 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.
7/29/2019 Analysis of Severn Trent
8/14
8
Table 2 Performance and infrastructure data for three water suppliers, 2008 (FAME, 2010)
Company
name
Year Turnover GBP Profit for the
period
Profit Margin Solvency ratio Number of
Employees
Rank Rank Rank Rank Rank
United
Utilities Water
2008 1,508,200 4 373,500 1 33.48% 1 22.81% 1 3,925 5
Seven Trent
Water
2008 1,324,900 5 164,000 4 21.25% 7 19.17% 3 5,624 2
Northumbrian
Water
2008 694,100 9 -12,700 9 22% 6 6.57% 11 3,174 8
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.
400
420
440
460
480
500
520
540
Sharep
rice
Date
Fig 8 - Industry 'portfolio' share price from 1st October2009 to 19th March 2010 showing overall upward trend
Industry
7/29/2019 Analysis of Severn Trent
9/14
9
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, asMyles 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).
4900
5000
5100
5200
5300
5400
5500
5600
5700
Sharep
rice
Date
Fig 9 - FTSE 100 share price index from 1st October 2009to 19th March 2010 showing overall upward trend
FTSE 100
7/29/2019 Analysis of Severn Trent
10/14
10
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 fluctuatingaround 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.
1060
1080
1100
1120
1140
1160
1180
Sharep
rice
Date
Fig 10 - SVT share price from 4th January to 4th February2010, showing positive trend on 19th January
SVT
5100
5200
5300
5400
5500
5600
Sharep
rice
Date
Fig 11 - FTSE 100 Index share price from 4th January to4th February 2010 showing overall negative trend
FTSE 100
19 Jan 10
7/29/2019 Analysis of Severn Trent
11/14
11
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.
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).
480490
500
510
520
530
540
550
560
Sharep
rice
Date
Fig 12 - Industry 'portfolio' share price for 4th January to 4thFebruary showing an overall positive trend over the period
Industry
255
260
265
270
275
280
285
290
295
Sharep
rice
Date
Fig 12 - NWG share price from 4th January to 4th February2010, showing sharp price increase from 2nd February
NWG
1 Feb 10
4 Nov 09
29 Jan 10
7/29/2019 Analysis of Severn Trent
12/14
12
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 smaller-
than-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.
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.
480
490
500
510
520
530
540
550
560
Sharep
rice
Date
Fig 13 - UU share price from 4th January to 4th February2010, showing general increase from 19th January
UU
19 Jan 10
1 Feb 10
7/29/2019 Analysis of Severn Trent
13/14
13
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-to-
get-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-rates-
will-surge-to-65-percent-by-2015-barclays-says.do[Accessed: 10/03/2010]
FAME (2010), Search by Company name, FAME.https://fame2.bvdep.com/version-
2010420/home.serv?product=fameneo&loginfromcontext=ipaddressFrom 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 EUin 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]
mailto:[email protected]://www.utilityweek.co.uk/news/uk/water/sign-up-to-get-live-updates-fr.phphttp://www.utilityweek.co.uk/news/uk/water/sign-up-to-get-live-updates-fr.phphttp://www.utilityweek.co.uk/news/uk/water/sign-up-to-get-live-updates-fr.phphttp://www.utilityweek.co.uk/news/uk/water/sign-up-to-get-live-updates-fr.phphttp://209.85.229.132/search?q=cache:7VTw56gdnT4J:www.drainageandwater.co.uk/+water+companies+in+uk&cd=5&hl=en&ct=clnk&gl=uk&client=firefox-ahttp://209.85.229.132/search?q=cache:7VTw56gdnT4J:www.drainageandwater.co.uk/+water+companies+in+uk&cd=5&hl=en&ct=clnk&gl=uk&client=firefox-ahttp://209.85.229.132/search?q=cache:7VTw56gdnT4J:www.drainageandwater.co.uk/+water+companies+in+uk&cd=5&hl=en&ct=clnk&gl=uk&client=firefox-ahttp://www.thisislondon.co.uk/standard-business/article-23802401-interest-rates-will-surge-to-65-percent-by-2015-barclays-says.dohttp://www.thisislondon.co.uk/standard-business/article-23802401-interest-rates-will-surge-to-65-percent-by-2015-barclays-says.dohttp://www.thisislondon.co.uk/standard-business/article-23802401-interest-rates-will-surge-to-65-percent-by-2015-barclays-says.dohttp://www.thisislondon.co.uk/standard-business/article-23802401-interest-rates-will-surge-to-65-percent-by-2015-barclays-says.dohttps://fame2.bvdep.com/version-2010420/home.serv?product=fameneo&loginfromcontext=ipaddresshttps://fame2.bvdep.com/version-2010420/home.serv?product=fameneo&loginfromcontext=ipaddresshttps://fame2.bvdep.com/version-2010420/home.serv?product=fameneo&loginfromcontext=ipaddresshttps://fame2.bvdep.com/version-2010420/home.serv?product=fameneo&loginfromcontext=ipaddresshttp://cachef.ft.com/cms/s/0/343910b6-06ee-11df-b058-00144feabdc0.htmlhttp://cachef.ft.com/cms/s/0/343910b6-06ee-11df-b058-00144feabdc0.htmlhttp://www.marketlineinfo.com/library/FinancialDeal.aspx?R=FD323171http://www.marketlineinfo.com/library/FinancialDeal.aspx?R=FD323171http://uk.reuters.com/article/idUKTRE6102Y620100201?pageNumber=1&virtualBrandChannel=11700http://uk.reuters.com/article/idUKTRE6102Y620100201?pageNumber=1&virtualBrandChannel=11700http://uk.reuters.com/article/idUKTRE6102Y620100201?pageNumber=1&virtualBrandChannel=11700http://www.otpp.com/wps/wcm/connect/otpp_en/home/newsroom/news+releases/2010/teachers+statement+re+northumbrian+water+group+plchttp://www.otpp.com/wps/wcm/connect/otpp_en/home/newsroom/news+releases/2010/teachers+statement+re+northumbrian+water+group+plchttp://www.otpp.com/wps/wcm/connect/otpp_en/home/newsroom/news+releases/2010/teachers+statement+re+northumbrian+water+group+plchttp://www.otpp.com/wps/wcm/connect/otpp_en/home/newsroom/news+releases/2010/teachers+statement+re+northumbrian+water+group+plchttp://www.otpp.com/wps/wcm/connect/otpp_en/home/newsroom/news+releases/2010/teachers+statement+re+northumbrian+water+group+plchttp://uk.reuters.com/article/idUKTRE6102Y620100201?pageNumber=1&virtualBrandChannel=11700http://uk.reuters.com/article/idUKTRE6102Y620100201?pageNumber=1&virtualBrandChannel=11700http://www.marketlineinfo.com/library/FinancialDeal.aspx?R=FD323171http://cachef.ft.com/cms/s/0/343910b6-06ee-11df-b058-00144feabdc0.htmlhttps://fame2.bvdep.com/version-2010420/home.serv?product=fameneo&loginfromcontext=ipaddresshttps://fame2.bvdep.com/version-2010420/home.serv?product=fameneo&loginfromcontext=ipaddresshttp://www.thisislondon.co.uk/standard-business/article-23802401-interest-rates-will-surge-to-65-percent-by-2015-barclays-says.dohttp://www.thisislondon.co.uk/standard-business/article-23802401-interest-rates-will-surge-to-65-percent-by-2015-barclays-says.dohttp://209.85.229.132/search?q=cache:7VTw56gdnT4J:www.drainageandwater.co.uk/+water+companies+in+uk&cd=5&hl=en&ct=clnk&gl=uk&client=firefox-ahttp://209.85.229.132/search?q=cache:7VTw56gdnT4J:www.drainageandwater.co.uk/+water+companies+in+uk&cd=5&hl=en&ct=clnk&gl=uk&client=firefox-ahttp://www.utilityweek.co.uk/news/uk/water/sign-up-to-get-live-updates-fr.phphttp://www.utilityweek.co.uk/news/uk/water/sign-up-to-get-live-updates-fr.phpmailto:[email protected]7/29/2019 Analysis of Severn Trent
14/14
14
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]
http://www.severntrent.co.uk/server.php?show=ConWebDoc.556http://www.severntrent.co.uk/server.php?show=ConWebDoc.556http://uk.finance.yahoo.com/q/hp?s=%5EFTSE&b=14&a=11&c=2009&e=16&d=11&f=2009&g=dhttp://uk.finance.yahoo.com/q/hp?s=%5EFTSE&b=14&a=11&c=2009&e=16&d=11&f=2009&g=dhttp://uk.finance.yahoo.com/q/hp?s=%5EFTSE&b=14&a=11&c=2009&e=16&d=11&f=2009&g=dhttp://uk.finance.yahoo.com/q/hp?s=%5EFTSE&b=14&a=11&c=2009&e=16&d=11&f=2009&g=dhttp://uk.finance.yahoo.com/q/hp?s=%5EFTSE&b=14&a=11&c=2009&e=16&d=11&f=2009&g=dhttp://www.severntrent.co.uk/server.php?show=ConWebDoc.556