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United Utilities- trading as expected

Nicholas Hyett, Equity Analyst | 27 September 2021 | A A A
United Utilities- trading as expected

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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%)
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Revenue in the first six months of the year is forecast to rise 4% compared to last year. This reflects higher consumption as more people work from home and businesses resume operations following lockdowns, only partially offset by regulatory revenue reduction.

Coupled with cost-saving initiatives this should lift underlying operating profit, though it will be somewhat offset by inflationary pressure. This doesn't include a £380m one-time tax charge due to new tax legislation.

The group expects a small increase to net debt, reflecting increased infrastructure investments.

The shares were broadly flat following the announcement.

View the latest United Utilities share price and how to deal

Our View

United Utilities is a utility as pure as the water that flows through its pipes. In return for providing a reliable and affordable water supply to North West England, Ofwat (the regulator) allows UU to earn an acceptable financial return.

With prices set by the regulator and reviewed every five years, utilities' earnings have tended to be stable and predictable - not to mention inflation linked. This has supported a reliable dividend.

With uncertainty still looming in the market, these qualities have become all the more desirable. Regulatory changes rather than market conditions are the main driver of UU's performance. Last year, the regulator reduced the level of financial returns UU and its water peers can earn, increased performance targets and reduced prices. However, as pandemic-related bad debt costs rose Ofwat loosened its price caps, allowing water companies to raise prices temporarily beginning in April 2022.

The impact of this change won't be felt yet--so the group will have to continue to slog through most of this year with lower prices taking a bite out of profits. UU is accelerating investment plans to try and make the best of it, but it's still not ideal. The dividend policy has been scaled back to growth in line with CPIH inflation--though the marked, but supposedly temporary, rise in consumer prices over the past few months might cause management to rethink this strategy.

UU's valuation is currently slightly above its long run average, which is understandable considering it's one of the more defensive stocks on offer. The group's ability to flex its prices alongside inflation means the dividend policy looks likely to remain for now, but no dividend is guaranteed.

United Utilities key facts

  • Price/Earnings ratio: 19.9
  • 10 year Average Price/Earnings Ratio: 18.1
  • Prospective dividend yield (next 12 months): 4.4%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Full Year Results (27/05/2021)

Full year revenue fell 2.8% to £1.8bn, reflecting lower bills thanks to regulatory price controls which inflationary increases only partially offset. Revenue was also reduced by lower business consumption, although this was offset by an increase in household consumption.

Lower revenue, increased infrastructure renewal spending and higher depreciation and amortisation had the largest impact on profits. Household bad debt was 2.2% of revenue, representing a £5m increase on last year.

Net debt increased from £7.2bn to £7.3bn, which is 62% of the group's Regulatory Capital Value, up from 61% last year. United Utilities generated £249.0m in free cash as cash generation rose and fixed investment in property, plant and equipment fell to £610.4m.

Capital spending next year is expected to be between £625m and £675m.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.