UU shares weighed down by political risk and regulatory performance lag

(by Verity Mitchell)

Equity analyst Morningstar has commended United Utilities (UU) as undervalued relative to Severn Trent. It cited re-nationalisation fears, high UK government bonds yields and its relative underperformance in AMP7 compared to Severn Trent.

According to the analyst, the prime minister has asked UU to forego its final dividend, payable in August. However it considered this political pressure to have no legal backing.

Furthermore, higher government bonds yields will naturally be reflected in higher base allowed returns at the next price review, creating revenue headroom.

Morningstar expected UU to achieve a regulated return on equity of 8.8%, exceeding its guidance and closing the gap with Severn Trent by 0.5%. It calculated that UU is currently trading on a 1.05x enterprise value premium to Regulatory Capital Value, closer to Pennon’s 0.97x. This is despite returns and growth that are more aligned to Severn Trent which is trading on 1.17x.

Catalysts for improved performance included “demonstrated return performance at fiscal 2027” and “no material intervention under Burnham”.

• UU has appointed Matt Pritchards, formerly of Severn Trent, as county business lead for water in Cheshire. He will lead a team of 225 operational and support staff responsible for treating and supplying drinking water to customers across the county. His remit includes a significant mains renewal programme that will upgrade 159km of water mains.