EUR 850.00 For Business Accounts Only

Morningstar | United Utilities Released Half-Year Results Above Our Expectations; Shares Overvalued

We are reaffirming our GBX 700 fair value estimate along with our no-moat and stable trend ratings after United Utilities released half-year results in line with consensus expectations, albeit above our full-year net income growth forecast. Shares are overvalued.

Underlying operating profit increased by 7% to GBP 368 million, above our 3.9% full-year estimate. The key driver was increased regulatory revenue partly offset by an GBP 11 million increase in infrastructure renewal expenditure. Reported operating profit was flattish due to the negative impact of extreme hot and dry weather. Underlying profit after tax grew 23% to GBP 197 million, well above our 4% full-year estimate. In addition to the increase in operating profit, net income was boosted by a GBP 24 million decrease in underlying net finance expense due to the impact of lower inflation on index-linked debt, in line with the guidance of late September's trading statement. Last but not least, net income was supported by a 3% tax rate, well below the 11% normal rate. This is due to the phasing of quarterly tax payments as payments of the first half are based on last year's lower profits. For the full year, the group guides for an effective cash tax rate of 6% below our 12%. In the 2019-20 fiscal year, the group guides for a tax rate of 20%, versus our 12%, reflecting tax payments for six quarters due to the transition to a new tax payment regime where there will be no more time lag. Altogether, we will increase our 2018-19 underlying net income on lower financial charges, tax rate, and higher increase in underlying operating profits and will lower our 2019-20 estimate on higher tax rate.

The impact of these changes on subsequent years' earnings and on valuation will be limited. We anticipate a 21% drop in 2021 net income owing to the cut in allowed returns in the new regulatory regime, in line with Ofwat's final methodology for the 2019 price review.