Business Overview

United Utilities Group PLC (LSE: UU) is a holding company primarily engaged in the provision of wastewater and water services through its subsidiaries. The company gather water from lakes, reservoirs, boreholes and streams; and collects, treats and deposits wastewater into sea and river. United Utilities collects water from houses, and transports it for treats sewage sludge, treatment works and generates renewable energy. It also provides infrastructure management services. United Utilities owns licenses for providing wastewater services and water to businesses and people across the North West of England.  The company is headquartered in Warrington, England, the UK.

Key Statistics



Key Employees

McAdam John David Gibson – Non-Executive Independent Chairman of the Board
Mogford Steven Lewis - Chief Executive Officer, Executive Director
Houlden John Russell - Chief Financial Officer, Executive Director
Fraser Steven Richard - Chief Operating Officer, Executive Director

Top Shareholders

 

Financial Performance – (H1FY19 vs H1 FY18)


(Source: Company filing, LSE)

For H1 FY19, revenue surged by £40 million at £916 million, largely on account of allowed regulatory changes.  Underlying operating profit for H1 FY19 stood at £368 million, increased by £24 million higher against the H1 FY18 operating profit. On account of the £40 million increase in revenue partly offset by £11 million increase IRE and a £6 million surge in depreciation. On the other hand, reported Operating profit declined by £3 million to £339 million, on account of a one-time costs of £25 million associated with the extremely hot and dry weather earlier this year. Reported profit before tax stood at £260 million, indicates movement in the fair value and other adjusting items. Reported Post-tax profit for H1 FY19 stood at £212 million, primarily reflects movement in the fair value. The company has a robust capital structure with a gearing ratio stood at 60% as on 30-Sept-2018. During the H1 FY19 company announced an interim dividend of GBX 13.76 per share, an increase of 3.9%, in line with the management expectations. Total capital expenditure for H1 FY19 stood at £393 million including IRE and additional capex in connection with extremely hot and dry weather earlier this year.

Stock Price Performance – 1 Year


Daily Chart as at Mar-12-19, before the market close (Source: Thomson Reuters)
 
Shares of United Utilities were trading higher at GBX 856.60 (as on 12-March-2019, 09:40 AM GMT), added 3.4 points or 0.18% against its previous day closing price. During the last one-year time period share have reached to a 52w high of GBX 863.40 and a 52w low of GBX 653.0, at the current price shares were trading around 0.9% below its 52w high price and 30.9% above its 52w low price. This indicates the stock is in an uptrend and has high potential to register a new 52w high in short-term time. In last one-year stock has delivered a return of 21.49% and on a year-to-date basis, the stock was up by 15.95% (as on Mar-11-19). Stock's beta of 0.84 indicates that stock is relatively less volatile compared with the movement in the benchmark index. At a volume standpoint, its 5day average daily traded volume was 6.62% higher as compared to the 30day average daily traded volume. 5day and 30day volume stood at 1.9 million and 1.85 million respectively. Shares were trading above its 30day, 60day and 200day simple average volume by 1.96%, 6.17% and 12.72% respectively. If a share trades considerably above its 200d simple moving average, it indicates that the stock is in uptrend or bull zone and has strong potential to move up further. At a dividend yield standpoint, United Utilities dividend yield of 4.72% was relatively very high compared with the peers operating within the same line of business.

Financial Ratios and Valuation

Ratios

 

Commentary

The company has significantly higher EBITDA margin compared with the industry peers median - for FY18, EBITDA margin of United Utilities Plc stood at 59.7% as compared with Industry median of 43.8%. Also, the company has reported consistently an EBITDA margin of above 50%, which indicates operational efficiency and prudent allocation of debt in the business. At Operating margin front, the company performed far better than its peers, United Utilities Plc operating margin stood at 36.7% for FY18 relatively very higher than the industry median of 27.4% during the same period. At return on equity standpoint, the company's performance was marginally lower than the industry median, during the FY18 return on equity stood at 12.3% compared with the industry median of 13.2%. At liquidity front in terms of current ratio, the company's liquidity position was relatively lower than the industry median. For FY18 current ratio of the company stood at 1.01 and on the other side industry median current ratio stood at 1.33. But liquidity improved marginally compared with previous year performance. At a leverage standpoint, the company is relatively more leveraged as compared with the industry median in term of debt/equity ratio. For FY18 debt-to-equity ratio stood at 2.68 whereas industry median stood at 2.17. It was mainly because of increased gross borrowing by £528 million in FY18.

Valuation Methodology

Method 1



While valuing United Utilities Plc on NTM Peers Average EV/EBITDA multiple, we have considered its peers like SSE PLC (NTM EV/EBITDA of 9.19x), Severn Trent PLC (NTM EV/EBITDA of 11.30x), National Grid PLC (NTM EV/EBITDA of 11.23x) and Orsted A/S (NTM EV/EBITDA of 12.3x) respectively.

Method 2



While valuing United Utilities Plc on the NTM Peers Average PE (x), we have considered its peers like SSE PLC (NTM PE of 12.19x), Severn Trent PLC (NTM PE of 14.74x), National Grid PLC (NTM PE of 15.17x) and Orsted A/S (NTM PE of 28.6x) respectively.

Note: All forecasted figures and peers have been selected from Thomson Reuters.

Risk & Growth Prospects

The company is using advanced technology from across the world and from other sectors to enhance the application of System thinking, and they have developed a full plan for the evolution of their key capabilities to deliver over the next five-year period. Also, the company has made a significant capital expenditure in FY18 that will drive revenue growth in the coming years. Its key risks are interest rate change, currency exchange rate risks and other macro environment risks.

Conclusion

For United Utilities Plc, FY18 was another strong performing year, as the company has a significant competitive advantage in terms of high EBITDA and Operating margins against its peers dealing within the same sector. Also, the company has made a significant capital expenditure in FY18 which will drive revenue growth in the coming years. Based on valuation as done using the above two methods we have given a BUY recommendation at the closing price of GBX 853.6 (as on 11-March-2019) with single digit upside potential based on 11x NTM Peers Average EV/EBITDA on FY19E EBITDA and based on 17.69x NTM Peers Average Price/Earnings on the FY19E EPS respectively.

*The buy recommendation is valid for the current price as covered in the report (as on 12th March 19).

Note- GBp or GBX are interchangeably used for Pence Sterling. 

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