Join our community of smart investors

United Utilities takes inflation hit

The drop in statutory earnings contrasted the water giant's strong regulatory outperformance
November 20, 2019

United Utilities (UU.) saw its underlying operating profit rise by 7 per cent to £393m in the first half of the 2020 financial year, benefiting from lower infrastructure renewals expenditure (IRE) and the absence of one-off extreme weather costs. Having invested more heavily earlier in the current regulatory cycle, AMP6, IRE dropped by more than a fifth to £68m. Statutory pre-tax profit was weighed down by finance expenses, which more than doubled to £194m due to the impact of higher retail price inflation on the group’s index-linked debt.

IC TIP: Hold at 888p

Regulator Ofwat rewards utilities for meeting or exceeding certain targets with outcome delivery incentives (ODIs). United Utilities has delivered cumulative net ODI outperformance of £21.4m for the first four years of AMP6 and anticipates this will reach £50m by the end of the cycle in 2020. Total net regulatory capital expenditure during the half was £323m and is set to increase to around £700m for the full year.

There are some hurdles looming ahead. On the question of nationalisation, chief executive Steve Mogford says he will “leave that to the politicians”. The group has achieved fast-track status for AMP7, committing £100m of additional outperformance reinvestment to ensure a “flying start”. But assuming a weighted average cost of capital of 2.7 per cent, RBC Capital Markets projects that “earnings are squeezed…with limited offset from outperformance”. The broker anticipates adjusted pre-tax profit of £488m and EPS of 58.1p for the full year, up from £460.3m and 55.5p in FY2019.

UNITED UTILITIES (UU.)   
ORD PRICE:888pMARKET VALUE:£6.1bn
TOUCH:887-889p12-MONTH HIGH:896pLOW: 713p
DIVIDEND YIELD:4.7%PE RATIO:20
NET ASSET VALUE:447pNET DEBT:£7.3bn*
Half-year to 30 SepTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201891626031.213.76
201993619523.314.20
% change+2-25-25+3
Ex-div:19 Dec   
Payment:03 Feb   
*Excludes £55m in lease liabilities