Company Reports

Utilities have reversed part of their first quarter’s fall, thanks to a strong rebound in power prices. Moreover, the deep undervaluation of renewables developers has driven takeovers by big investment firms at very high multiples. Neoen’s main shareholders accepted an offer at 18 times the EBITDA. The sector is still significantly lagging the market in 2024 because of high interest rates. Should they fall, it would boost the sector.

We maintain our GBX 1,040 fair value estimate after National Grid released fiscal 2024 results that were in line with company-compiled consensus and a new 5-year strategic plan calling for a massive step-up in investments to be funded by a GBP 7 billion rights issue and noncore asset disposals. The firm will pay a GBX 58.5 dividend in fiscal 2024, 5.6% above last year. It extends its target to grow the dividend in line with inflation through fiscal 2029 with the caveat that the 2024 dividend will be rebased to take into account the rights issue's shares. All in all, we forecast a 2025 dividend of GBX 43.

We confirm our GBX 1,000 fair value estimate for no-moat United Utilities as we incorporate its fiscal 2024 results that were slightly ahead of FactSet consensus and our estimates. The group guided for fiscal 2025 below expectations on a recurring basis. The fiscal 2024 dividend is set at GBX 49.8, 9.4% higher than in fiscal 2023 and in line with the November 2022 consumer price index including owner-occupiers' housing costs and involving a 4.5% yield. The group guides for a fiscal 2025 dividend of GBX 51.87, implying 4.2% growth. We expect the policy to grow the dividend in line with inflation to be extended to the next five-year regulatory period AMP8, starting in April 2025. The UK water watchdog Ofwat will release its draft decision regarding AMP8's features on June 12 and its final determinations in December. In early 2025, United Utilities will unveil its dividend policy for AMP8. All in all, shares appear overvalued.

European utilities have reversed their outperformance in the fourth quarter of 2023 because of a fall in wholesale power prices in the wake of gas prices after a very mild winter, and a pickup in interest rates due to inflation receding more slowly than expected. The former led to some of the companies, most exposed to power prices, cutting their guidance for 2024.

We maintain our GBX 1,000 fair value estimate after no-moat United Utilities confirmed its fiscal 2024 guidance in a trading update, although it tweaked its outcome delivery incentive guidance from over GBP 50 million to GBP 40 million because of adverse weather, namely heavy rains and storms. Fiscal 2024 results will be published on May 16. Shares look fairly valued, but can be appealing to income investors due to a fiscal 2024 dividend yield of 4.8% by our estimates and a policy to grow the dividend in line with inflation that we expect to be extended to the next five-year regulatory period called AMP8 for the U.K. water sector, starting in April 2025. The U.K. water watchdog Ofwat will release its draft decision regarding AMP8's features in June. The final determinations will be released in December. In early 2025, United Utilities will unveil its dividend policy for AMP8.

Much of Britain's water infrastructure is more than 200 years old and could require major upgrades during the next decade. We project that United Utilities, which is one of 11 U.K. water utilities, will invest around GBP 500 million annually during the next five years in its water and wastewater system to address those needs.

European utilities are up by 14% year to date, slightly underperforming the broader European markets. Since the end of September, the sector strongly outperformed thanks to the rally in government bonds and solid third-quarter results that drove multiple guidance upgrades although growth slowed down from the second quarter due to higher comps. All in all, companies that are the most exposed to commodity prices are set to exceed their 2022 record profits in 2023. Meanwhile, firms with big retail businesses that were hit by a margin squeeze because of the energy crisis in 2022 will post a significant rebound in earnings.

We maintain our fair value estimate of GBX 960 per share along with our no-moat rating after United Utilities released fiscal 2024 first-half results boosted by the indexation to high inflation of last year and a reduction in finance expense. The interim dividend is set at GBX 16.59, 5.7% higher than last year. The final dividend should also grow by 5.7%, implying a total fiscal 2024 dividend of GBX 48.1 and a 4.4% yield, in line with the sector median. Still, we view the shares as overvalued as evidenced by a fiscal 2024 P/E of 36 times.

European utilities have underperformed the European market by 4% year to date with most of the underperformance occurring in the third quarter because of the rise in interest rates. This overshadowed strong second-quarter results driven by the easing of the energy crisis, persisting commodity price volatility, and the hedging improvement. These drivers have persisted in the third quarter. Moreover, some power price clawbacks expired at the end of June like in Germany and Belgium. On the flip side, the comparison basis will be tougher as of the third quarter.

Much of Britain's water infrastructure is more than 200 years old and could require major upgrades during the next decade. We project that United Utilities, which is one of 11 U.K. water utilities, will invest around GBP 500 million annually during the next five years in its water and wastewater system to address those needs.

We maintain our GBX 850 fair value estimate after no-moat United Utilities released a net loss slightly smaller than expected by us and FactSet consensus and guided for fiscal 2024 earnings below consensus. The firm will pay a GBX 45.1 dividend on fiscal 2023 earnings, 4.6% higher than in fiscal 2022, in line with the November 2021 Consumer Price Index including owner-occupiers' housing costs, implying a 4.4% yield. Shares look materially overvalued.

We maintain our GBX 850 fair value estimate after no-moat United Utilities confirmed its fiscal 2023 guidance in a trading statement. Fiscal 2023 results will be released on May 25. The 2023 dividend yield is 4.4% and the company pledges to grow the dividend in line with inflation through fiscal 2025. However, we view the shares as materially overvalued. For income-seekers interested in regulated utilities, we recommend National Grid, which yields 4.6%, pledges to grow its dividend in line with inflation through fiscal 2026, and whose shares appear fairly valued.

We maintain our fair value estimate of GBX 850 per share along with our no-moat rating after United Utilities released fiscal 2023 first-half results largely in line with what it preannounced in its late September trading statement. Interim dividend is set at GBX 15.7, 4.6% higher than last year, in line with the guidance. The final dividend should also grow by 4.6%, implying a total fiscal 2023 dividend of GBX 46 and a 4.4% yield, in line with the sector median. On the other hand, we foresee a 5.1% average annual decline in adjusted EPS through fiscal 2027, well below the 2.3% average annual growth that we project for the sector in the meantime. All in all, we view the shares as significantly overvalued despite an unappealing earnings profile.

Much of Britain's water infrastructure is more than 200 years old and could require major upgrades during the next decade. We project that United Utilities, which is one of 11 U.K. water utilities, will invest around GBP 500 million annually during the next five years in its water and wastewater system to address those needs.

Much of Britain's water infrastructure is more than 200 years old and could require major upgrades during the next decade. We project that United Utilities, which is one of 11 U.K. water utilities, will invest around GBP 500 million annually during the next five years in its water and wastewater system to address those needs.

We don't expect to materially change our GBX 790 fair value estimate after no-moat United Utilities warned on its fiscal year 2023 profit because of high inflation and lower water consumption. The firm will release its half-year results on Nov. 23. We see the shares as materially overvalued.

We maintain our GBX 790 fair value estimate after no-moat United Utilities released fiscal 2022 results in line with Factset consensus, but set 2023 guidance below them, chiefly because of high inflation. The group intends to pay a final dividend of GBX 29 on fiscal 2022, implying a total dividend of GBX 43.50 and a 3.9% yield. The 2022 dividend is 0.6% above last year, in line with the Consumer Price Index including housing costs, or CPIH, between November 2019 and November 2020, included in the fiscal 2022 revenue. The group confirms its target of increasing the dividend in line with the CPIH through fiscal 2025, which is attractive in a high-inflation environment. However, this is more than priced in with a 2022 P/E of 20.7.

We have raised our fair value estimate to GBX 790 per share from GBX 760 for no-moat United Utilities. This reflects a higher 2022 fiscal EPS estimate that is mostly due to a tax credit, which the group announced in its trading statement ahead of fiscal 2022 results to be released May 26. Otherwise, the group affirms that current trading is in line with its expectations for fiscal 2022. We view the shares as materially overvalued.

Much of Britain's water infrastructure is more than 200 years old and could require major upgrades during the next decade. We project that United Utilities, which is one of 11 U.K. water utilities, will invest around GBP 500 million annually during the next five years in its water and wastewater system to address those needs.

We maintain our fair value estimate of GBX 760 per share along with our no-moat rating after United Utilities released fiscal 2022 first-half results largely in line with what it preannounced in its late September trading statement. Interim dividend is set at GBX 14.5, 0.6% higher than last year. Applying the same rate to the final dividend points to a total 2022 dividend of GBX 43.46, implying a 4.1% dividend yield, slightly below the sector average. On the other hand, we foresee a 0.9% average annual decline in adjusted EPS through fiscal 2026, well below the 6% average annual growth that we project for the sector in the meantime. All in all, we view the shares as significantly overvalued despite an unappealing earnings profile.