Analysts Upgrade United Utilities

THE VALUE INVESTOR: Analysts have upgraded their fair value estimate for the share price of United Utilities, but the water company remains overvalued

Andrew Bischof 4 December, 2014 | 3:57PM
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Much of Britain's water infrastructure is around 200 years old and could require major upgrades during the next decade. We project that United Utilities (UU.) which is one of 11 U.K. water utilities, will invest roughly £1.6 billion during the next two years in its water and wastewater system to address these needs.

Unlike in the United States, where regulators frequently approve utility rates only after the capital is invested, regulators in Britain approve capital budgets and utility rates once every five years based on utility budget forecasts. Utilities then must stay within that budget to achieve sufficient rates of return. United Utilities is currently under review for its upcoming 2015-2020 rates with a decision expected in December 2014. The current revised plan calls for average household bills falling by 4.1%.

United Utilities' regulated water-distribution monopoly leads us to assign the firm a narrow economic moat. But we caution investors to beware of execution risk in Britain's five-year price reviews, as the company must meet performance targets, along with the threat of continued conservation.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
United Utilities Group PLC1,002.00 GBX0.60Rating

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Andrew Bischof