United Utilities Group PLC

United Utilities Group Plc (LON: UU.) is a provider of water and wastewater services in the North West region of England. It is involved in generating renewable energy, corporate fiduciary, provide funding, and management of the property. It serves households and business customers of about three million and 200,000 respectively.

On 25^th March 2020, the company will announce the pre-closing trading update.

Recent News
On 5^th February 2020, the company announced that Russ Houlden, as a Chief Financial Officer of the Company, has decided to retire and will step down from the group’s Board at the 2020 AGM to pursue a non-executive career.

On 29^th January 2020,the company released that after cautious consideration, its main subsidiary, UUW, had accepted the final determination.

Financial Highlights (for the six months ended 30 September 2019, £million)


(Source: Interim Reports, Company Website)

In the first half of the financial year 2020, the company’s revenue was GBP 935.5 millionas compared to GBP 916.4 million in H1 FY2019 due to its allowed regulatory revenue changes. Underlying operating profit in H1 FY2020 was up by GBP 24 million to GBP 391.7 million as compared to GBP 367.8 million in H1 FY2019 due to the reduction in the infrastructure renewals expenditure.

The underlying profit after tax was GBP 198.2 million in H1 FY2020as compared to GBP 196.9 million in H1 FY2019. The reported profit after tax declined to GBP 158.6 million in H1 2020 against GBP 212.5 million in H1 FY2019 due to the fair value movements. The company declared a dividend of 14.2p per share for the first half of the fiscal year 2020.

Share Price Performance

Daily Chart as at February-19-20, before the market closed (Source: Thomson Reuters)

United Utilities Group PLC shares were trading at GBX 1,062.60 at the time of writing before the market close (at 11:26 AM GMT) on 19^th February 2020 and were up by 2.52% versus the previous day closing price. Stock 52 weeks High and Low are GBX 1,064.00/GBX 744.20. The group’s stock is reflecting the lower volatility as against the benchmark index based on the company’s beta of 0.66.
Valuation Methodology

Key Risks
Potential change in the political and regulatory environment and frameworks, failure to meet all legal and regulatory obligations and responsibilities, failure to provide a secure supply of clean, safe drinking water and the potential for a negative impact on public confidence in water supply, failure to remove and treat wastewater, and Failing to provide appropriate resources (human, technological or physical resource) required to support business activity.

Conclusion
The water industry is facing many challenges in the current year.The company has reported a decent financial performance in the first half of the fiscal year 2020. However, the underlying net finance expense of the company was GBP 142 million for the first half of FY2020, up by GBP 11 million than the first half of last year, due to the higher RPI inflation and the impact of new debt and interest rate swaps. The higher RPI inflation charge compared with previous year contributed to the group's average underlying interest rate of 4.0 per cent being higher than the rate of 3.8 per cent for the six months ended 30 September 2018. Dry weather event could affect the revenue of the company. Any increase in restructuring costs could impact the profitability of the company. The company operations are impacted negatively due to uncertainty created by the Brexit as it will result in uncertain political and economic climate for short to medium term. Moreover, the company is trading near its 52-week high, raising doubts at its upside potential at current prices.

Based on the headwinds faced by the group and supported by valuation, we have given a "WATCH" recommendation at the current price of GBX 1,062.60 (as on 19th February 2020, before the market close), while we look for any upcoming catalysts in the near term.
 
 
*All forecasted figures and Peers information has been taken from Thomson Reuters.

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