United Utilities Group
United Utilities Group PLC (UU) is a United Kingdom-based company, which manages the regulated water and wastewater network. The company holds a license and operates in the North West of England, serving around seven million people across 3.2 million households and 200,000 business premises. The company also owns and manages other infrastructure assets around its reservoirs, making it the largest corporate landowner in England. The company's operations are differentiated in three core operating segments: Wholesale water charges, Wholesale wastewater charges and Residential retail charges. Steve Mogford is the Chief Executive Officer of the group.

Key Financial Highlights -1H FY 2019 (£, inmn)
 
(Source: Company Filings)

Reflecting allowed regulatory revenue changes, the group’s revenue was up by £40.4 million, at £916.4 million. Underlying operating profit rose by £23.8 million to £367.8 million, while reported operating profit decreased by £3 million, to £339 million, reflecting regulatory changes in revenue calculation. Driven by a £23.9 million decrease in the underlying net finance expense and increase in operating profit, the underlying profit before tax rose by £46 million to £240.3 million, while reported profit before tax increased by £17 million to £260 million. While basic earnings per share increased from 28.9 pence to 31.2 pence, underlying earnings per share increased from 23.5 pence (H1 FY18) to 28.9 pence in H1 FY19. The management increased the interim dividend by 3.9 per cent to 13.76 pence per share. RCV Gearing (regulated capital value) stood at 60 per cent as at 30 September 2018, reflecting the robust capital structure and is comfortably within the company’s target range of 55 per cent to 65 per cent.

Valuation Methodology

Method: Price/Cash Flow Multiple Approach (NTM)


Share Price Commentary

Daily Chart as at April-11-19, before the market closed (Source: Thomson Reuters) 

On 11^th April 2019, at the time of writing (before the market closed, at GMT 10:25 am), UU shares were trading at GBX 819.20, down by 1.15 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 879.60/GBX 674.30. The company’s stock beta was 0.82, reflecting lower volatility as compared to the benchmark index. The outstanding market capitalisation was around £5.64 billion with a dividend yield of 4.86 per cent.

Conclusion
The company is continuously seeking to improve service through strong operational performance and innovation, with robust capital structure and strong pensions position providing resilience and future financial flexibility. The company’s Systems Thinking approach continues to make a notable difference to its long-term, sustainable performance and enables it to unlock innovation opportunities. Moreover, being a utility company, it is comparatively immune to cyclical movements. The company will need to constantly adapt to and plan for climate change in order to maintain a constant and sustainable flow of fresh water. Based on strong growth prospects and supported by the valuation done using the above method, we have given a BUY recommendation at the closing price of GBX 828.80 (as on 10th April 2019) with single digit upside potential based on 7.54x NTM Price/Cash Flow (approx.) on FY19E cash flow per share.

Royal Bank of Scotland Group
Royal Bank of Scotland Group PLC (RBS) is a banking and financial services company which offers a range of products and services to individuals, small and medium-sized enterprises, and mid-corporate and large corporate clients. The company's products and services include personal lending, banking and risk management, investments, commercial lending, currencies and financing, and deposits. The company's operations are differentiated in four operating segments: Personal & Business Banking (PBB), Commercial & Private Banking (CPB), RBS International (RBSI), and NatWest Markets. Ross McEwan is the Chief Executive Officer of the group.

Key Financial Highlights - FY 2018
 
(Source: Company Filings)

While total income increased by £269 million, or 2.0%, the company reported an operating profit before tax of £3,359 million in FY18, rising from £2,239m reported in FY 2017. Profit attributable to shareholders also rose from £752m in 2017 to £1,622m in 2018, representing a more consistent financial performance. Improvement in profitability was driven by stable income generation as well as by de-risking the balance sheet further and reducing operating costs. Amid ultra-loose monetary policy, the net interest margin reduced from 2.13% to 1.98%. Though the cost to income ratio decreased to 71.7%, it is still very high then the company's long-term target of achieving below 50%. Earnings per share increased to 13.5p and return on tangible equity stood at 4.8%. This financial year, the company paid its first dividend in a decade with an interim dividend of 2p per share. Subject to shareholders approval, the company will pay a final dividend of 3.5p and a special dividend of 7.5 pence per share.

Valuation Methodology

Method: Price/Earnings Multiple Approach (NTM)

Share Price Commentary

Daily Chart as at April-11-19, before the market closed (Source: Thomson Reuters) 

On 11^th April 2019, at the time of writing (before the market closed, at GMT 12:20 pm), RBS shares were trading at GBX 258.10, up by 1.97 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 288.98/GBX 194.44. The company’s stock beta was 0.76, reflecting lower volatility as compared to the benchmark index. The outstanding market capitalisation was around £30.54 billion with a dividend yield of 2.17 per cent.

Conclusion
In FY 2018, despite a highly competitive environment and uncertain economic outlook, the bank delivered a relatively well financial performance. It has made continued progress in building a stronger and safer bank, which was reflected by the company's first dividend paid in a decade. This also shows that the company is capable of delivering better returns for stakeholders. As the government undertook a further sell-down of its majority stake in the bank, the company made further progress in its journey towards a return to private ownership. Moreover, the group resolved some major legal issues, including the US Department of Justice investigations. Based on strong growth prospects and supported by the valuation done using the above method, we have given a BUY recommendation at the closing price of GBX 253.20 (as on 10th April 2019) with single-digit upside potential based on 10.17x NTM Price/Earnings (approx.) on FY19E earnings per share.

*All forecasted figures and peers have been taken from Thomson Reuters.
*The buy recommendation is valid for the current price as covered in the report (as on April-11-19).
 

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