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On Friday, Deutsche Bank (ETR:DBKGn) analysts adjusted their outlook on Severn Trent Plc (LON:SVT:LN) (OTC: SVTRF), reducing the price target from GBP27.00 to GBP26.00, while maintaining a Hold rating on the stock. This reevaluation follows Severn Trent’s recent Capital Markets Day (CMD), where the company presented an operational update.
During the CMD, Severn Trent provided new guidance, forecasting operational outperformance of at least £300 million. This figure includes up to £50 million in rewards for achieving Price Control Deliverables (PCDs) and the remainder from Outcome Delivery Incentives (ODIs). ODIs are incentives for meeting specific operational targets, such as reducing water leakage.
The guidance suggests that Severn Trent is poised to continue as a sector leader in ODIs. However, the projected performance is lower than the approximately £420 million achieved in the 2020-25 regulatory period. After adjusting for tax, the difference is less stark, but it still represents a decrease in expected performance.
Deutsche Bank had anticipated a level of ODI outperformance for Severn Trent similar to the last regulatory period. The new guidance, therefore, came in below their expectations, especially considering the company’s significantly larger Regulatory Asset Base (RAB). As a result, the lowered guidance implies a reduced Return on Regulatory Equity (RORE) uplift compared to previous achievements.
Severn Trent’s latest operational guidance reflects a cautious but still positive outlook on the company’s ability to meet regulatory milestones and deliver tangible operational outcomes. Despite the lower guidance for the upcoming period, Severn Trent remains a leading company in its sector regarding operational incentives.
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