United Utilities Group Plc

United Utilities Group Plc (LON: UU) manages electricity distribution, water distribution and wastewater network in the North West region of England.

The Company will announce the pre-closing update on 24 September 2020.

Investment Highlights - United Utilities Group Plc – Buy at GBX 839.20

• The Company’s RCV gearing stood at 62% in FY2020 and received a stable credit rating of A3 from Moody’s, BBB+ from Standard & Poor’s and A- from Fitch, and has been rated World Class for 13 consecutive years on Dow Jones Sustainability Index.
• As per valuation metrics, EV/EBITDA, Price/Earnings and Price/Book Value multiples of the United Utilities Group Plc are currently lower as compared to the corresponding multiples of the Water & Related Utilities It reflects, shares are undervalued as compared to the industry.
• United Utilities Group Plc has a dividend yield of 5.01 per cent, which is higher than the industry dividend yield of 4.97 per cent. The Operating profitability stood in line with the Industry median.

Key Risks

• The potential change in the political environment and regulatory frameworks could negatively impact operational and financial performance.
• Failure to meet any legal obligations and inability to provide appropriate resources could negatively impact the performance of the Company. 
• The Company operations may be impacted due to the Covid-19 mayhem and changing market dynamics in the near term.

Financial and Operational Highlights – Financial Year 2020 (31 March 2020)

(Source: Annual Report, Company Website) 

• The Company is focused on delivering reliable services and is providing financial support schemes to 120,000 customers.
• UU has a strong business continuity plan and has not furloughed any employee, while 60% of the workforce is working from home setup.
• The Company has a strong financial position to tackle the impact of Covid-19. On an adjusted basis, the Company has shown an improvement in the profitability margins, despite the uncertain times.
• The Company has solid liquidity to support dividend payment in accordance with AMP6 policy.
• Under AMP6 policy, the Company is focused on making the operational transformation to provide improved customer service and maximise shareholders value.

One Year Share Price Chart

Daily Chart as of 4 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Technical Performance

From the technical standpoint, 14-day RSI is currently close to an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Conclusion

The Company has a strong financial position to tackle the impact of Covid-19 pandemic. On Underlying basis, the Company has shown an improvement in financial performance for FY2020. UU is focusing on innovation and sustained investments, to protect and enhance the environment, support local communities and deliver against challenges. The Company provides excellent customer satisfaction in the water sector. The stock made a 52-week low and high of GBX 743.00 and GBX 1,068.50, respectively.

Based on the decent prospects and support from the valuation as done using the above method, we have given a “BUY” recommendation for United Utilities Group Plc at the current market price of GBX 839.20 (as on 4 September 2020, before the market close at 8:08 AM GMT+1), with lower double-digit upside potential based on 7.80x Price/NTM Cash Flow (approx.) on FY21E cash flow per share (approx.).

Severn Trent Plc

Severn Trent Plc (LON: SVT) is amongst the 10 largest water and sewerage regulated companies in England and Wales.

The Company will announce the half-year results on 26 November 2020.

Investment Highlights - Severn Trent Plc – Buy at GBX 2,369.00

• The Company received a stable credit rating of Baa2 from Moody’s and BBB from Standard & Poor’s.
• In the last one year, the Company delivered a substantial return of 16.54% and delivered higher returns compared to the FTSE-100 Index. Over the course of 4 years (FY16 – FY20), the company’s operating profit surged from GBP 523.80 million in FY16 to GBP 563.30 million in FY20. Compounded annual growth rate (CAGR) stood at 1.83 per cent.
• The Company has delivered a substantial ROE (Return on Equity) of 13.2% in FY2020 and stood higher against an industry median of 9.2%. The Company continue to reduce the Debt/Equity ratio from the financial year 2017.

Key Risks

• To meet the new regulations the Company needs to implement new processes, failing to do so would increase the compliance risk.
• One of the principal risks faced by the Company, which might result in a failure to deliver on strategic priorities.

Update on Trading Performance (released on 15 July 2020)

• The Company stated that the first-quarter performance has been in line with anticipations and continues to expect trading for the financial year 2021 to be consistent with the previous guidance.
• SVT has already contracted 80% of the year one capital programme under the AMP7 plan and stays on track to invest £430 million to £510 million this year in infrastructure.
• The balance sheet stays strong with committed facilities of £1.1 billion, and in June 2020, the Company issued inaugural Sustainable Bond to raise £300 million for over 20 years at 2% fixed rate.

One Year Share Price Chart

Daily Chart as of 4 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Technical Performance

From the technical standpoint, 90-day RSI is currently close to an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Conclusion

The Company has been encouraged by cash collections broadly in line with the corresponding period a year ago. The Company stayed confident of a net positive outcome on Customer ODIs (Outcome Delivery Incentives) and made a strong start to the year 2020. Also, the Company has good financial resilience to manage the impact of the COVID-19 outbreak. SVT has a proven track record of paying consistent dividends. The stock made a 52-week low and high of GBX 1,957.50 and GBX 2,716.00, respectively.

Based on the decent prospects and support from the valuation as done using the above method, we have given a “BUY” recommendation for Severn Trent Plc at the current market price of GBX 2,369.00 (as on 4 September 2020, before the market close at 8:04 AM GMT+1), with lower double digit upside potential based on 9.40x Price/NTM Cash Flow (approx.) on FY21E cash flow per share (approx.).

*All forecasted figures and Industry Information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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