United Utilities Group Plc Ordinary 5p (UU.)

Company overview

Headquartered in Warrington with 9,000 employees, United Utilities was created via the merger of North West Water and Norweb Electricity in 1995. The group holds a licence to provide water and sewage services to a population of around seven million people in North West England. United Utilities Plc is an international multi-utility business whose activities include water supply and distribution, waste water services, and utility contracting solutions. Its shares are listed on the London Stock Exchange and it is a member of the FTSE 100 Index.

HL Comment (1 February 2012)

The group's third quarter update saw management highlighting in line trading. In the first half of 2011/12, revenue increased by around 4%, compared with the first half of last year, with the trend continuing. Management noted that "the group continued to implement a wide range of business improvement initiatives. Encouragingly, the number of customer complaints received via the Consumer Council for Water had reduced further in the three months to December 2011." Looking ahead, management noted "its confidence in delivering a good underlying financial performance for the year ending 31 March 2012."

Negative Points:

• As indicated previously, infrastructure renewals expenditure and depreciation are expected to be higher in the second half of 2011/12, compared with the first six months of the financial year.
• As expected, group net debt is slightly higher, compared with the position at 30 September 2011, principally reflecting ongoing high levels of capital investment and after taking account of the 2011/12 interim dividend payment.
• United Utilites operates in a highly regulated environment and is dependent on its ability to meet tough regulatory efficiency targets and frequent reviews.
• The company remains under pressure to improve performance targets, manage costs / service levels efficiently and deliver respectable customer satisfaction targets.

Positive Points:

• Trading is currently proving to be in line with prior management expectations.
• The company noted that it was “making good progress with regards to its capital investment programme.” Industry regulator Ofwat recently announced that the average household water and sewerage bill in England and Wales will rise by 5.7% in 2012 as water companies gear up to potentially invest over £20 billion over the next five years.
• United Utilities has moved up four places to fifth position, out of the ten water and sewerage companies, based on Ofwat's quarter three 2011/12 qualitative service incentive mechanism (SIM) assessment.
• Following agreement in November 2011 for a £200 million index-linked term loan facility with the European Investment Bank, to support delivery of the capital investment programme, management noted that it "had headroom to cover its projected financing needs into 2014."
• Gearing remains in the middle of Ofwat's assumed range (55% to 65% net debt to regulatory capital value), supporting a solid A3 credit rating for United Utilities Water Plc.
• The group previously reported sustained improvements in customer bad debts, despite a challenging economic climate.
• The group's business remains highly defensive when set against a backdrop of a challenging economic environment.
• An interim dividend of 10.67p was announced back in November 2011, an increase of 6.7%.

Consensus:

On balance, market consensus opinion denotes a buy.

All yield figures are variable and not guaranteed.

Fundamental Data

Values are quoted in the stock's local currency: British pound.