Severn Trent lags behind its peers

SEVERN Trent, Britain's second-biggest listed water stock, suffered a 3.8% fall in annual profit because of rising costs. The earnings fall was in line with forecasts.

Pretax profit before goodwill amortisation and exceptional items fell to £262.2m in the year ended 31 March, the company said. Pension charges amounted to £31m. Analysts had forecast profit between £250m and £263m, with an average forecast standing at 255.4m.

Severn Trent's profit fall contrasts with higher profits enjoyed by the rest of Britain's listed water companies, such as market leader United Utilities. Investors had long expected the earnings fall after Severn Trent warned last year of the higher pension charges.

However, Severn Trent shares still fell by 12½p to 996½ pence in early morning trade - among the top losers in London's blue-chip FTSE 100 index.

severn's figures are 'in line but weak relative to Severn Trent's peers' says Dresdner Kleinwort Wasserstein (DKW) in a research note, maintaining a 'hold' rating on Severn Trent shares.Brokerage Williams de Broe also kept a 'hold' rating.

Many investors hold UK water shares for their dividend yields - which are among the highest in the London market - and Severn Trent's total dividend rose 3% to 48.51p, beating analyst forecasts.

'We intend to maintain, as a minimum, dividends in real terms at least up to 2009-2010,' said Chairman John Egan.

However, brokerage DKW said the company could have committed to a more generous dividend policy and described Severn Trent's dividend outlook as 'potentially slightly disappointing'.

One part of the company's business that has been weak is Severn Trent's laboratories unit. The division tests various chemical substances and has suffered in the United States due to the weakness of the dollar.

Severn Trent Chief Executive Colin Matthews said the company had no plans to sell the laboratories unit, which accounts for around 3% of group profit.

'We are focused on improving the laboratories business,' he told reporters on a conference call.Brokerage DKW said the decision not to restructure non-core operations could again disappoint investors.

Severn Trent shares have underperformed the DJ Stoxx European utility sector by about 3% since the start of 2005.