What's new:
■ On track to submit plan to Ofwat for next review period
■ Trading in line with expectations
■ Economic climate still weighing on volumes
United Utilities' (UU.) yield attractions have been back in focus recently as the US Federal Reserve's decision not to reduce its bond buying programme has kept income stocks looking enticing versus bonds. With price increases set by water regulator Ofwat, water companies such as United Utilities offer investors a visible dividend stream. In United Utilities' case, the company has promised to increase dividends at a rate of 2 per cent above inflation each year for the current review period.
The company's recent trading update confirmed that trading is in line with expectations. Revenue is expected to be ahead of the comparable period as regulatory price increases offset the impact of a tough economic climate on volumes in the company's North West hub. Underlying operating profit should be moderately higher, too, thanks to cost controls.
United Utilities says it is on track to deliver its 2010-15 regulatory targets and is well advanced with its business plan for the 2015-20 Ofwat review period, with the plan due to be submitted to the regulator by 2 December.
Citi says...
Neutral (700p target price). United Utilities remains the most exposed to the proposed regulatory changes, in our view, but this is reflected in the valuation and management is making progress in addressing the key issues. With declining returns resulting in lower profitability and cash flow, we would expect United Utilities to rebase its dividend by 10-15 per cent in 2015-16. Of the UK water companies, United Utilities has seen the most merger and acquisition speculation in the past year or so. However, it is the least well positioned in terms of the regulatory changes. With this is mind, we believe a potential acquirer may find it hard to justify a bid before the publication of draft determinations from Ofwat in the second quarter of 2014. Expect EPS of 42.4p (year-end March 2014), rising to 45.4p in 2015.
RBC says...
Underperform (650p target price). The market is focused on United Utilities and its peers' business plans for the next regulatory period (2015-20). These are due out in early December and, given the timing of the half-year release on 27 November, we expect this to be a bigger discussion point than the results. In particular, the market will look for an update from management on its exposure to the average cost-to-serve (ACTS) mechanism within the household retail price control. ACTS is currently the single most exposed risk area for United Utilities, and before Ofwat's recent finalisation of the framework, United Utilities estimated that it may lose "over £300m" in revenues across the five-year period.
