Interactive Investor

ii view: United Utilities steady after battle with frozen pipes and leaks

28th March 2023 11:26

by Keith Bowman from interactive investor

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Shares for this major water utility fell 9% in 2022 but have gained in 2023. We assess prospects. 

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Full-year trading update

ii round-up:

Northwest water company United Utilities Group Class A (LSE:UU.) today blamed December's freeze-thaw conditions for an impact on current full year results. 

Revenue for the year is now expected to be 1% lower than previously hoped given reduced consumption, while management’s expectation for Outcome Delivery Incentives (ODI) payments falls to £20-£25 million from £30 million previously. ODIs are paid to water companies by the regulator for meeting or exceeding targets in relation to operational items such as reducing leakage.

Shares in the FTSE 100 company fell by more than 2% in UK trading before recoverin, having come into this latest announcement up by 4% year-to-date. Fellow water company Severn Trent (LSE:SVT) is up by a similar amount in 2023, while the wider FTSE 100 index is down by just under 1% year-to-date. 

Despite the challenges of freeze-thaw conditions in the winter, United still expects ODIs over the course of the current regulatory period to 2025 to come in at £200 million. The fall in consumption is also expected to be made up for.. 

Elevated inflation is expected to push United’s financing costs £10 million higher than previously estimated to around £175 million, although applicable tax credits will offset this. Overall operating costs, having previously risen, have remained within its previous guidance. 

Group net debt is expected to increase compared to the first half’s £7.83 billion, largely reflecting the impact of inflation on its near £4 billion of index-linked debt. However, company debt remains within management’s comfort range, with credit rating agency Moody’s continuing to award it a solid A3 rating.  

Full-year results to the end of March are scheduled for 25 May and will be presented by United’s incoming chief Louise Beardmore and will include an update on group strategy. 

ii view:

Headquartered in Warrington, United operates thousands of kilometres of water pipes and sewers from Carlisle in north Cumbria to Crewe in south Cheshire. Employing around 5,000 people, it delivers 1.8 billion litres of water a day to more than 3 million homes and businesses in the Northwest of England. It is increasingly using technology, with sensors being used in its pipe network to spot potential leaks early. 

For investors, the weather and its impact on operations needs to be remembered. Rising costs including those for its inflation-linked debt warrant consideration, as do regular negotiations with the industry regulator, and the water industry’s accountability and impact on the environment. 

On the upside, and despite this latest weather-related setback, management’s focus on efficiency and operational improvements continues, demand for water generally changes little no matter what the economic backdrop, and the current regulatory period runs through to 2025, and dividends are also linked to inflation. A new chief executive may also add vigour to its strategy. 

For now, and while elevated costs offer some caution, a historic and forecast dividend yield of over 4% is likely to keep income orientated investors onboard.

Positives: 

  • Attractive dividend payment (not guaranteed)
  • Holds an A3 credit rating with Moody’s

Negatives:

  • The weather can influence performance
  • Subject to regulatory changes

The average rating of stock market analysts:

Hold

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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