In an uncertain market, United Utilities has bubbled up after a positive trading statement.
The water company said current trading was in line with expectations, and it was confident of hitting its regulatory targets. First half profit was forecast to be similar to the same time last year, with a regulated price rise offset by a special customer discount and cost pressures including bad debts.
The company said it was in talks with Ofwat about differences between its business plan and the regulators draft determinations for the five years to 2020. Final determinations are due in December. Analyst Angelos Anastasiou at Whitman Howard said:
Some indications are given for the first half, with our interpretation being that pre-tax profit will be slightly ahead of the first half [last year]. Of continuing interest remains the outcome of the water price control review, where United Utilities was one of the three companies mentioned by Ofwat on 6 August as having "very material differences between [their] re-submitted business plans and Ofwat's wholesale cost assessment"... United will have to provide further evidence and amendments to its business plan by 3 October to try to sway Ofwat's thinking. The update confirms that there are ongoing discussions with Ofwat and other stakeholders, and we still ultimately see a reasonable outcome here. The water subsector's takeover attractions remain over the medium term, but United's shares have corrected back down from a recent high of 908p on 26 August.
Meanwhile James Brand at Deutsche Bank pointed out that Labour had taken a shot at the water companies at this week's party conference, but believed the next five year plan should still provide some certainty over pricing, and meant water companies might still be attractive bid targets. He said:
At the Labour Party conference [on Tuesday], the shadow Environment Secretary, Maria Eagle, argued that a new deal was needed for the water sector. Although the comments on water make up a fairly small part of her speech, they will raise concerns that regulatory visibility may be lower if Labour win the next general election in May 2015. A year ago the Labour Party committed to freezing energy bills for eighteen months if elected and has said that it may intervene in a number of sectors. The comments are unhelpful although the regulatory review should deliver lower real bills and continued high investment which could defuse the politics. In our view there is scope for a politically acceptable outcome, while still providing scope for attractive returns for investors.
While the comments from Labour reduce regulatory certainty, the completion of the review in December 2014 should provide five years of pricing visibility. While there are uncertainties around the timing of any bids, history tells us that total clarity is not always needed and in our opinion bids are still possible after the review. Current valuations are underpinned by return expectations rather than purely by bid hopes, in our view.
