United Utilities first-half underlying revenue rose 10.9% to £1.1bn, largely due to inflation-linked tariff increases.
Underlying operating profit climbed 23.8% higher to £335.7mn, driven by the top line growth which more than offset increased operating costs.
Free cash flow rose from £24.1mn to £38mn as increased cash generation more than offset higher investment spending. Net debt rose from £8.5bn to £9.1bn.
Full-year guidance has been reiterated. Revenue is expected to rise by around 10%, and underlying operating costs are set to grow faster than inflation.
An interim dividend of 17.28p was announced, up 4.2%.
The shares were broadly flat in early trading.
Our view
United Utilities’ first-half results were broadly in line with market expectations. Both revenue and profits rose at double-digit rates in the period, meaning that full-year guidance remains on track.
In return for providing a reliable and affordable water supply to Northwest England, Ofwat allows United Utilities to earn an acceptable financial return. Over the medium term, the group's allowed to increase prices alongside inflation, providing a natural hedge to rising costs. The caveat here is that the funds are only received two years later.
We’re seeing the positive impact of these high inflation-linked increases on the group's revenue now, which is more than offsetting higher costs and helping profits grow at a faster pace. That’s a tailwind that looks set to continue in the near term.
Outcome Delivery Incentives (ODIs) climbed to a record £34mn last year – the highest amount in the sector. ODI’s are bonuses received for delivering above and beyond committed levels of service to customers. That figure has now become the minimum expectation this year as the group hopes to eclipse the record reward.
The balance sheet remains stable, with debt levels in the middle of the group’s target range. This helps support the group's ambitious £13.7bn plans to expand and upgrade its assets between 2025-2030. Although United Utilities still needs to raise a large chunk of cash, which will require issuing new debt and likely push debt levels towards the top end of its target range.
Affordability pressures impacting customers' ability to pay their bills is also something to be wary of. Despite the large tariff increases of late, this looks under control for now and there's government support in place. But United Utilities is calling for this to be more fairly distributed, with some of the country's most deprived communities being within the areas it services.
All in, the group runs a tight ship, with some of the best margins relative to peers. Its regular cash flows and inflation-linked revenue are enviable assets to have in an uncertain environment. But the group's not immune to missteps. Adverse weather and sewage leaks could continue to present challenges, and increase the risk of reputational damage.
Environmental, social and governance (ESG) risk
The utilities industry is high-risk in terms of ESG. Management of these risks tends to be strong, with European firms outperforming their overseas counterparts. Environmental risks like carbon emissions, resource use and non-carbon emissions and spills tend to be the most significant risks for this industry. Employee health and safety and community relations are also key risks to monitor.
According to Sustainalytics, United Utilities’ management of ESG risk is strong.
In 2023, it was a lead performer in preventing pollution incidents, with the lowest number of incidents relative to peers per 10,000km of sewers. However, United Utilities’ ageing infrastructure means it’s exposed to climate impacts such as heavy rainfall and flooding. It has also been implicated in occasional drinking water contamination issues and some releases of untreated sewage, resulting in an ongoing investigation by regulators.
United Utilities key facts
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