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.

Investment Highlights - United Utilities Group Plc – Buy at GBX 880.80

• As per valuation metrics, Price/Earnings and Price/Book Value multiples of the United Utilities Plc are currently lower as compared to the corresponding multiples of the Water & Related Utilities industry. It reflects, shares are undervalued as compared to the industry.
• United Utilities Group has received a solid credit rating of A3 with Moody's.
• From the technical standpoint, shares were trading above the short-term support level of 20-day (GBX 178.70) simple moving average prices, which reflects an uptrend in the stock.

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. 

Update on Trading Performance (released on 24 September 2020)

• The Company’s trading performance stood in line with management expectations for 6 months period ending 30 September 2020.
• The Company is continuously supporting customers during the pandemic and provided support through extensive financial assistance schemes and Priority Services scheme.
• The Company remained on track against AMP7 plan and continue to target net ODI (outcome delivery incentive) for FY2020/2021.
• The Company has a consistent cash collection from the household customer base and expects bad debt to increase after the end of government support schemes.
• Due to covid-19 pandemic, the Company expects revenue to decline by 5% in H1 FY2020/2021.
• The Company continue to make an investment in the asset base and is benefitted by the responsible financial risk management approach.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company is expecting a decline in revenue and underlying operating profit, due to the impact of covid-19 pandemic. Despite the decline, the Company is consistent with cash collection from the household customer base. UU has a strong balance sheet, gearing within the target range, a stable IFRS pension surplus and a solid A3 credit rating with Moody's. The Company continue to make an investment in the asset base and expects a small increase in the net debt. 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 880.80 (as on 7 October 2020, before the market close at 8:00 AM GMT+1), with lower double-digit upside potential based on 8.60x 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.

Investment Highlights - Severn Trent Plc – Buy at GBX 2,477.75

• In the last one year, the Company has delivered a substantial return of ~ 17.81% and delivered higher returns compared to the benchmark Index (FTSE-100 Index).
• The Company received a stable credit rating of Baa2 from Moody’s and BBB from Standard & Poor’s.
• From the technical standpoint, shares were trading above the short-term support level of 20-day (GBX 2,451.25) simple moving average prices, which reflects an uptrend in the stock.

Key Risks

• To meet the new regulations, the Company needs to implement new processes, failing to do so would increase the compliance risk.
• The Company might fail to deliver on strategic priorities, which will impact the operational and financial performance.

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

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

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 Company has been encouraged by cash collections broadly in line with the corresponding period a year ago. The stock made a 52-week low and high of GBX 1,994.50 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 price of GBX 2,477.75 (as on 7 October 2020, before the market close at 8:00 AM GMT+1), with lower double-digit upside potential based on 10.60x Price/NTM Cash Flow (approx.) on FY21E cash flow per share (approx.).

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

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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