United Utilities Group Plc (UU.) Ordinary 5p
HL comment (25 March 2021)
United Utilities' (UU) current trading is in line with expectations. Full year revenue is expected to fall 3% thanks to a lower regulatory allowance, as higher household consumption largely offset lower business demand. Underlying operating profit is expected to be lower than last year thanks to the fall in revenue and higher infrastructure renewal spending.
Finance costs are expected to be £100m, lower than last year thanks to the impact of lower inflation on UU's index linked debt. Net debt is expected to rise slightly though compared to the end of September.
The share price was broadly unchanged following the announcement.
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.
The current pandemic has been a strong reminder of these qualities. While many companies faced, and continue to face, significant earnings uncertainty, the pandemic played second fiddle to regulatory changes for UU.
But while insulated, UU was not immune.
Business demand has fallen, which has been largely offset by an increase in household demand. Furthermore, businesses and homes are under strain and that's impacting their ability to pay their water bills. Reassuringly, bad debts have been no worse than expected so far.
This brings us to the new regulatory regime. The regulator has reduced the level of financial returns UU and its water peers can earn, increased performance targets and reduced prices.
This isn't good news for investors, as lower prices are already hitting revenue and profit. 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. Even this reduced policy was put under review when the pandemic started, but it now looks like UU is committing to it.
UU's valuation is currently slightly above its long run average, which is understandable as the outlook for the economy is still uncertain despite positive news around vaccines. The dividend policy should be relatively stable going forward, but as ever nothing is guaranteed.
United Utilities key facts
- 12m forward Price/Earnings ratio: 19.4
- 10 year average 12m forward Price/Earnings Ratio: 17.9
- Prospective yield: 4.8%
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.
Half year results (25/11/20)
United Utilities' underlying first half profit before tax fell 12.7% to £213m. The fall primarily reflects lower revenue thanks to regulatory changes and some higher costs and infrastructure spending.
The board has recommended an interim dividend of 14.41p per share, 1.5% higher than last year and in line with the group's policy of growing the dividend alongside CPIH inflation.
Half year revenue fell 4.4% to £894.4, reflecting lower bills thanks to regulatory price controls. Revenue was also reduced by lower business consumption, although this was mostly offset by an increase in household consumption.
Underlying operating profit fell 18.5% to £319m, primarily due to lower revenue and some increased costs, especially in Infrastructure and Renewals. Profit before tax was also helped by lower interest costs on inflation linked debt.
Bad debt provisions are 1.8% of revenue. Management does not expect the current £17m provision to be exceeded. Net debt increased from £7.4bn to £7.6bn, and United Utilities generated £83.3m in free cash.
Full year revenue is expected to be between £1.75bn and £1.80bn, while operating costs are expected to rise due to inflationary costs and infrastructure investments. Finance costs are expected to fall thanks to lower inflation.
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 disclosure for more information.
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