Sunday share tips: Severn Trent, Arrow Global

In the Sunday Times’ Inside the City column, John Collingridge looked at how much has changed for water utility Severn Trent in the five years since shareholders rejected a £22-a-share offer from the Canadian LongRiver consortium.

Now, it was existing in an environment in which the government wanted to clamp down on its swelling returns and rising interest rates, and an opposition that wants to see it renationalised.

Its stock had plunged from almost £25 a year ago, but staged a recent minor recovery and was sitting at £20.88 a share - giving it a valuation of £4.9bn and leaving it precariously close to being pushed out of the FTSE 100.

Severn, Collingridge says, claims to have been unfairly tarnished by reputations built-up by less reputable water supplier - a likely reference to Thames Water, which was fined a record £20m a year ago for pumping 1.9 billion litres of sewage into the Thames.

But still, Severn hasn’t been a model student, having been fined £0.25m last month for killing thousands of fish as a result of a dangerous chemical leak, and being made to stump up £0.46m in 2016 for repeated sewage leaks.

None of those came close to Thames Water’s indiscretion, though.

Severn Trent chief Liv Garfield recently highlighted its status as the water firm with the lowest bills in Britain, and its four-star Environment Agency rating.

And she has a point, Collingridge says, noting that Severn appeared to be largely operating within Ofwat’s guidelines.

It was right where the regulator wanted its debt gearing to be at 60%, he said.

Last year, however, Severn drew a target on its own back by promising an inflation-beating dividend of RPI plus 4% until 2020.

That was a popular move among its pension and insurance fund shareholders, Collingridge said, but reduced Severn Trent’s flexibility if Ofwat’s next round of regulation is even harsher than feared.

“Sticking two fingers up to the water watchdog amid the most febrile atmosphere since privatisation is a risky tactic,” he wrote.

“Avoid.”

Over in the Mail on Sunday, Joanne Hart focussed on non-performing loans buyer Arrow Global for her Midas piece, saying its shares - currently at 278.5p - deserved to be “considerably higher”.

Arrow buys batches of nonperforming loans from banks in the UK and on the continent at an average price of 10p in the pound.

On most of these loans, the banks had lost track of the customers, but Arrow is an expert at tracking them down and then worked with defaulters who were able to pay using long-term plans.

The firm also works with charities and the likes of Citizens Advice in a bid to keep up standards, and while a number of other players had entered the market recently, Arrow’s relationships with the big banks were an asset.

Arrow floated at 205p in 2013, and since then had expanded its scope to Belgium, the Netherlands, Ireland, Italy and Portugal, with two thirds of its profits now coming from the continent.

It is also involved in the restructure of property debts, from small unpaid mortgages to mammoth outstanding commercial loans.

In its 2017 results, it saw revenues rise 35% to £319m and profits improve 30% to £70.3m, forecasting revenues of £319m and profits of almost £81m for this year, with an anticipated dividend of 12.7p giving its shares a yield of over 4.5%.

Still, its shares were down significantly from a high of 470p last summer as the increasing market competition unnerved investors.

It was also the target of a hedge fund late last year, which said Arrow was too reliant on cheap funding under its current business model.

That was a claim chief executive Lee Rochform denied vehemently, saying the business was “stronger than ever”, with first quarter figures showing good progress.

Analysts were largely supportive of its current direction as well, Hart said, noting that the stock was worth more than 450p with “robust” long-term prospects.

“Acquiring bad debts and creating practical repayment plans can be a complex task, requiring a network of banking relationships, financial acumen and empathy with debtors,” she wrote.

“Arrow believes it ticks all three boxes and recent results are encouraging.

“At 278.5p, the shares are a bargain and the dividend is attractive too.”