We don’t support this browser anymore.
This means our website may not look and work as you would expect. Read more about browsers and how to update them here.

Skip to main content
  • Register
  • Help
  • Contact us

United Utilities - full year results preview

George Salmon | 26 March 2019 | A A A
United Utilities - full year results preview

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

United Utilities Group Plc Ordinary 5p

Sell: 1,010.50 | Buy: 1,011.00 | Change 31.00 (3.16%)
Chart View factsheet

Market closed | Prices delayed by at least 15 minutes | Switch to live prices

United Utilities has confirmed trading remains in-line with expectations. Revenue and underlying profit are both likely to rise this year, on account of higher allowed returns from the regulator.

Ofwat has fast-tracked its plans for the 2020-25 period, which should give the group greater clarity ahead of the new regulatory period.

The shares were little moved on the news.

View the latest share price and how to deal

Our view

While the various Brexit permutations have buffeted other sectors, utilities revenue and profits are shielded from the wider economic or political uncertainty. After all, come rain or shine, we all need water.

Instead, shareholders can expect the company to focus on making incremental improvements to its service, while delivering its target of RPI-linked dividend growth. The prospective yield next year is currently 4.9%.

However, there are still other external factors in play. The placid conditions enjoyed in recent years look to be changing, and that's pushed the shares to fall from 20+ times expected earnings to a shade under 15.

First on the list of headwinds is the change in interest rates, which have finally started to trend upwards. Higher rates have the effect of eroding the relative appeal of shares over other income-focused assets like bonds and gilts.

Water utilities are under political pressure too, with the debate over nationalisation resurfacing for the first time in decades. Perhaps in light of Westminster's sharper focus on utilities, regulator Ofwat will introduce a tougher pricing structure from 2020.

The group has increased investment to improve efficiency, but stricter regulations will make delivering higher returns more difficult. While it's also confident it can find significant cost savings, analysts expect profits to drop. That could have knock-on effects for the dividend.

Nonetheless, at this stage we feel it's likely any change to the policy would be at the pace of future increases, rather than a material rebasing. With that in mind, barring any significant political surprises in the near future, many of the fundamental attractions of companies like UU should remain in play, especially for income-seeking investors.

Register for updates on United Utilities

Trading details (21 November 2018)

Half year revenue rose 4.6% to £916m, with underlying operating profit, which excludes the impact of extreme weather and restructuring, rose 6.9% to £368m.

Total net regulatory capital investment was £393m. For the full year, UU expects to spend £830m, including £70m of additional investment around shoring up the network after the extreme hot and dry weather earlier in the year.

Net debt rose from £6.7bn to £6.9bn, as factors including capital expenditure, dividends and interest costs more than offset operating cash flow and gains on derivative positions.

However, the increase in regulatory capital value saw gearing, a measure of indebtedness that compares net debt to asset values, drop from 61% to 60%.

The group has delivered continued improvements in customer service, and remains on track to achieve £11m in service incentive mechanism rewards, and up to £30m in outcome deliver incentive rewards from the regulator in the 2015-2020 regulatory period.

UU has submitted its plans for the next regulatory period, and expects to be able to save £1bn over 2020-2025 compared to the 2010-15 period, while still lowering prices in real terms.

Find out more about United Utilities shares including how to invest

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.