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United Utilities a Possible Target for Infrastructure and Pension Funds

United Utilities has, in our view, benefited from a substantial flight to safety that has driven its valuation well into overvalued territory

Mark Barnett 17 August, 2012 | 4:21PM

We are maintaining our fair value estimate for United Utilities (UU.) despite publicised speculation that the company is the target of a takeover.

The company's pure-play regulated water business would make it a possible target for infrastructure and pension funds, especially given the significant amount of investment needed to bring the UK's water infrastructure into the 21st century. However, we note that even prior to the rumours, the company was trading at nearly 17 times 2013 earnings, 15 times 2015 earnings per share, and more than 6 times operating cash flow per share. Similar to its United States peers, United Utilities has, in our view, benefited from a substantial flight to safety that has driven its valuation well into overvalued territory. Above-average returns on equity reflect heavy allowed leverage levels rather than excellent operating results, though we do consider United Utilities to be a competent operator. 

That being said, it's impossible to know for certain whether a suitor will decide that price isn't an overly critical component of its investment and overpay for the company to the delight of current shareholders. Activity in the regulated space in the US certainly has reflected a willingness to pay up for the assumed stability of regulated cash flows. 

Read the full Morningstar research report on United Utilities here. Morningstar research is available to Premium members. Not a member? Get instant access when you take a free 14-day trial.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
United Utilities Group PLC910.00 GBX0.00
About Author

Mark Barnett  Mark Barnett is a stock analyst with Morningstar.