HSBC highlights defensive attractions of Severn Trent

HSBC raised its target price on Severnt Trent and stuck to its 'hold' recommendation due to the attractions of its 'defensive' nature.

That was despite the fact that Severn Trent had been the strongest performer of its UK regulated peers in 2016, with its shares rising by 20% versus the MSCI Utilities index.

Among the company´s strong points, HSBC highlighted the predictability of its dividend, which was set at 81.5p for 2016/2017 with annual dividend growth thereafter of at least RPI until March 2020.

The recent decision by ratings agency Moody´s to lift its outlook on the company´s debt from 'negative' to 'stable' was also a plus, analysts Verity Mitchell, Adam Dickens and Pablo Cuadrado said in a research note sent to clients.

On the downside, the company´s triennial pension revaluation might bring to light a need for additional contributions, the analysts said.

HSBC arrived at its new target price of 2,330p (up from 2,250p) by using a mixed methodology using a weighted average from the results of three different valuation methods: discounted free cash flows (25%), sum-of-the-parts (25%) and dividend yield (50%).

The broker also added-in the regulated asset growth from its acquistion of Dee Valley and assumed the firm was accelerating investment in order to boost its outcome delivery incentives.

"Our target price implies 5% upside from the current share price, and we maintain our Hold rating as we believe its defensive nature will be attractive to investors but it is already priced in the current market price," they said.