United Utilities hasseen revenues rise recently, so should you buy in? Phil Oakley investigates.
What is United Utilities?
United Utilities (UU) provides water and wastewater services to 3.2 million households and more than 400,000 business premises in the northwest of England. Its assets include 184 reservoirs, 575 wastewater treatment plants and over 85,000 kilometres of water mains and sewers. These were valued at £8.4bn in September 2011. The company's revenues and profits are regulated by Ofwat, which reviews customer bills and investment levels every five years.
What is the company's history?
North West Water plc was formed in 1989 during the privatisation of the British water industry. In 1995 it merged with electricity distribution company Norweb to create United Utilities. In addition to its regulated activities, the company built a portfolio of non-regulated businesses during the late 1990s with investments in telecoms, support services and international water companies. During the last decade, the utility businesses faced the combined challenges of tough regulatory reviews and high levels of debt. The result was a change in strategy and a cut in dividends. In 2006 and 2007, United Utilities sold its telecoms, electricity distribution and business outsourcing companies. With the remaining support services business sold in 2010, it is now a pure water company again.
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Who runs it?
Steve Mogford (a former chief operating officer at BAE Systems) has been chief executive since April 2011. His base salary is £650,000. Former ICI chief executive John McAdam is chairman. Russ Houlden is chief financial officer.
How is trading?
Results for the six months to September 2011 saw revenues rise by 3.9% to £793m, but higher investment costs led to operating profits falling by 1% to £324m. Higher interest costs resulted in a 2.5% fall in underlying earnings per share to 19.9p and the interim dividend was raised by 6.7% to 10.67p per share.
What's the outlook?
Good financial planning and efficiency improvements should allow the firm to increase its annual dividends by 2% more than inflation until 2015. The longer-term outlook is more uncertain. The company faces an Ofwat review of prices in 2015, while the current benefits of its inflation-linked revenues could prove to be temporary. Water companies have yet to demonstrate that they can generate enough surplus cash to cover dividends and have relied on rising asset values and debt to increase payouts.
Our view
The attractions of inflation-linked revenues and a 5.3% yield are already priced into the shares. Hold.
The analysts
Of the 17 analysts surveyed by Bloomberg, seven say "buy", eight say "hold" and two advise investors to "sell". The average price target is 676p 11% above the current share price. The most bullish of the analysts is Exane, with a 770p price target, whereas Socit Gnrale is most bearish of all: it has a 488p target.Asset performance director, Steven Fraser, sold 3,869 shares on 30 September, while chief executive officer Steve Mogford purchased 15,928 shares on 27 May.
Directors' dealings
Executive directors must hold the equivalent of their annual salary in shares within five years of appointment. Dealing transactions are shown in the chart on the left, with management's shareholdings shown in the table below.
R Houlden 47,333
J McAdam 1,837
S Mogford 95,047
The numbers
Stockmarket code: UU
Share price 607p
Market cap: £4.1bn
Net assets (September 2011) £1.8bn
Net debt (September 2011) £5.0bn
P/E ratio (current year estimate) 16.2x
Yield (prospective) 5.3%
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