Severn Trent Plc

Severn Trent Plc (LON: SVT) is amongst the 10 largest water and sewerage regulated companies in England and Wales. The company is focused on providing high-quality services to over 4.3 million customers, both for business and households. Severn Trent Plc was incorporated in the year 1989 and was headquartered at Coventry, the United Kingdom. The company acquired Capital Controls Company in 1990 and started building its products and services business in the US as well.

Financial Highlights – H1 Financial Year 2020 (30^th September 2019, GBP, million)

(Source: Interim Report, Company Website)
 
In the first half of the financial year 2020, the group’s turnover increased by 3.2 per cent to £910 million against £881.5 million recorded in the first half of FY2019, on account of tariff increase in Regulated Water and Wastewater revenue and growth in business service’s external turnover. Profit before interest and tax declined to £285.3 million in H1 FY2020 as compared to £299.1 million in H1 FY2019. The Profit before taxation was £180.7 million for H1 FY2020 against £203.6 million for H1 FY2019. The profit for the period stood at £146.7 million in the first half of the financial year 2020 as compared to £165.1 million in H1 FY2019. The company’s Basic Earnings per share were 61.7 pence in the first half of the financial year 2020 against 69.8 pence in H1 FY2019. The company’s Diluted Earnings per share were 61.5 pence for H1 FY2020 against 69.7 pence in H1 FY2019.

Share Price Performance

Daily Chart as at6^th December 2019, before the market close (Source: Thomson Reuters)

On 6^th December 2019, Severn Trent Plc shares were trading at GBX 2,223 at the time of writing before the market close (at 11:44 AM GMT), up by 0.32 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 2,379.00/GBX 1,757.01.

Valuation Methodology

*Peers: Telecom Plus Plc, United Utilities Group Plc, Pennon Group Plc, SSE Plc and Drax Group Plc.

Conclusion
The company had shown a decline in the financial performance in the first half of the financial year 2020. Although the revenue has increased for the period, while the profitability has declined by the period. The company needs to manage its operating costs more efficiently.

The company operates in a complex regulatory environment and has submitted its future plans for 2020 to 2025 to The Water Services Regulation Authority (OFWAT), but the company is not clear about its outlook till Dec-19. The company’s supply chain will be affected by the ongoing uncertainty created by the Brexit. The company’s financial performance is also affected by the fluctuations created due to an exchange rate and interest rate. 
Therefore, after considering the recent performance of the company, we have given a “Watch” recommendation at the current price of GBX 2,234 (as on 6^th December 2019, before the market close at 8:00 AM GMT), while we look for any upcoming catalysts in the near term.

Pearson

Pearson Plc (LON: PSON) is a British-based learning company. The group serves private and public institutions, governments, and individual learners in numerous countries to provide them with education products and services like test development, processing, and scoring services and a wide range of other education services.

Trading Update (for the first nine months of 2019)
As per the update, the company expects stability in its revenue. The company expects its US Higher Education Courseware business to perform low as against the expectations. The adjusted operating profit to be in the range of £590-£640 million. The company stays on track to provide in excess of 330 million pounds of annualised cost savings, with the full advantage accumulating from the end of the year 2019 onwards. The financial position stays strong, and the company continue to anticipate year-end net debt to be broadly in line with 2018 data.
Financial Highlights – H1 Financial Year 2019 (30th June 2019, £, million)

(Source: Interim Report, Company Website)

In the first half of the financial year 2019, on an underlying basis, the group recorded growth in all its three segments, with total revenue during the period under review registered a growth of 2 per cent. However, on a headline basis, sales declined by 2 per cent from £1,865 million in H1 FY2018 to £1,829 million in H1 FY2019, mainly on account of the sale of non-core businesses. Adjusted operating profit on an underlying basis grew by 30 per cent to £144 million in H1 FY2019 from £107 million in H1 FY2018. The company’s reported operating profit declined to £37 million in H1 FY2019 from £233 million in H1 FY2018, driven by restructuring charges and disposal of businesses. During the period under consideration, the board of the company approved an interim dividend of 6.0pence/share and recorded a growth of 9.09% on a YoY basis.

Share Price Performance

Daily Chart as at6^th December 2019, before the market close (Source: Thomson Reuters)

On 6^th December 2019, Pearson Plc shares were trading at GBX 637.20 at the time of writing before the market close (at 11:48 AM GMT), up by 0.35 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 1,030.00/GBX 619.60.

Valuation Methodology

*Peers: Reach Plc, WPP Plc and Wilmington Plc.

Conclusion
The company is exploring innovative ways of deploying the new technology platform so that they can provide students with highly convenient, affordable, adaptive, digital courseware. The company still anticipate revenue across the company as a whole to stabilise this year, with encouraging progress in several parts of the group. The company structural growth which includes several certifications and activities delivered a strong performance which is driven by an increased investment in the last two years.

Through its digital transformation, the company is well-positioned. From the last three years, the company is now in much better shape. The company is now a more digital, more efficient, and leaner company with a robust balance sheet.

Over the course of 4 years (FY14 - FY18), the company’s Net Income surged from £471 million in FY14 to £588 million in FY18. Compounded annual growth rate (CAGR) stood at 5.7 per cent.

Based on the decent prospects which are supported by valuation done using the above method, we have given a “BUY” recommendation at the closing price of GBX 635 (as on 5^th December 2019) with single-digit upside potential based on 12x NTM Price/Earnings (approx.) on FY19E earnings per share (approx.).
 
*All forecasted figures and Peer information have been taken from Thomson Reuters.
*The “Buy” recommendation is valid for the current price as covered in the report (as on 6^th December 2019).

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