UK Utilities

Research evidence excerpt

UK Utilities

Valuation Method and Risk Statement

Utilities face a wide range of commercial, technical, operating, regulatory and political or

policy risks which can be hard to assess completely, including the risk of adverse

developments in the framework for regulated utility network as well as commodity and

regulatory risk in power generation, retail and other areas.

United Utilities: Our Price Target is based upon our sum-of-the-parts DCF valuation, breaking

out the different components of outperformance. We review the spread between the

allowed return and the UBS estimate of the cost of capital faced by the company and use this

to calculate the implied valuation. OFWAT currently allows a 4.03% CPIH vanilla real allowed

return across April 2025-March 2030E. We then derive the equity value of United Utilities by

taking away our forecast estimate of net debt and provisions. We add the value of the Water

Plus JV. Principal risks are regulation that is more adverse than anticipated. Political

intervention (e.g. re-nationalisation at below fair value) would also present a risk, as would a

sharper rise in UK bond yields or fall in UK inflation. Our rating would be at risk if there was (a)

a takeover by an infrastructure investor prepared to accept lower returns; or (b) deterioration

in fundamentals or earnings power due to weak returns and potentially rising bond yields.

Pennon Water: Our Price Target is based upon our sum-of-the-parts DCF valuation, breaking

return across April 2025-March 2030E. We then derive the equity value of Pennon by taking

away our forecast estimate of net debt and provisions. We add the value of the B2B water

supply businesses. Pennon Water Services and Water2Business. Principal risks are regulation

that is more adverse than anticipated.