EUR 850.00 For Business Accounts Only

Morningstar | United Utilities Releases Full-Year Results in Line With Expectations; Shares Overvalued

We are reaffirming our GBX 700 per share fair value estimate for United Utilities Group, along with our no-moat and stable trend ratings, after management reported underlying 2019 fiscal-year operating profit of GBX 685 million, up 6%, but above our GBX 662 million estimate. The company increased the annual dividend per ordinary share by 3.9% to GBX 41.28, in line with our and consensus' expectations, and with management's policy of increasing the dividend in line with the U.K. retail price index. We expect allowed returns to be hit by the new regulatory regime starting in 2020. Shares are overvalued.

After management reported 2019 fiscal-year results roughly in line with expectations, the key driver of operating profit growth was regulatory revenue increases, which were partially offset by higher depreciation and an increase in infrastructure renewal expenditures. On a reported basis, operating profit was basically flat at GBX 635 million because of additional expenses linked to the dry weather last summer. Revenue grew 5% to GBX 1,819 million, above our 2.5% growth estimate, reflecting allowed regulatory revenue increases. Underlying net profit rose by 24% to GBX 379 million, slightly above consensus' GBX 369 million but below our GBX 408 million estimate, after higher taxation charges. In addition to operating profit growth, net profit was boosted by a decrease in net finance expenses driven by the positive impact of lower inflation in index-linked debt.

We do not expect to materially change our earnings forecasts following this publication. Our forecasts point to an average annual decline in net income of 1.7% through 2023. Key to that is the 15% drop that we expect in 2021 because of the cut in allowed returns in the new regulatory regime, in line with Ofwat's 2019 price review.