United Utilities expects higher revenue, profit

Warrington-based water giant United Utilities said in a trading update on Monday its revenue and underlying operating profit for the first half of 2021-22 ending September 30 is expected to be higher than the first half of last year.

“Household consumption remains high as many customers continue to work from home and consumption from businesses has started to return to pre-Covid levels as restrictions are lifted,” said United Utilities .

“Overall, the net increase in revenue in the first half of the year is expected to be around 4 per cent.  

Underlying operating profit for the first half of 2021/22 is expected to be higher than the first half of last year.

“This largely reflects higher revenue and targeted efficiencies partly offset by higher underlying operating costs, largely as a result of inflationary increases in our core costs.”

Last year, in the six months to September 30, 2020, United Utilities revenue fell about 4.4% to £894.4 million and first-half profit before tax profit rose about 3% to £201.1 million.

The company said it expects to incur a deferred tax charge through its income statement of around £380 million in the first half of 2021-22 but to “provide a more representative view of business performance” this deferred tax charge will be excluded from its underlying profit measures.

“At the full year to March 2021, we simplified our approach to alternative performance measures (APMs) such that we no longer, as a matter of course, adjust our underlying earnings for restructuring costs, net pension interest, capitalised borrowing costs and routine prior years’ tax matters,” said United Utilities.

“We expect the underlying net finance expense for the first half of 2021/22 to be around £25 million higher than the first half of last year.

“Higher inflation applied to the group’s index-linked debt is expected to increase the underlying net finance expense for the first half by around £55 million and is partly offset by a £30 million reduction as a result of the change in APMs.

“The introduction of capital allowances super deductions announced in the Chancellor’s Budget is expected to reduce the group’s current tax charge significantly in 2021/22 and result in an underlying tax rate of around 5 per cent for the first half of the year.

“The legislation to increase the headline rate of corporation tax to 25 per cent from 1 April 2023 was enacted in May 2021.

“As a result, we expect to incur a deferred tax charge through the income statement of around £380 million in the first half of 2021/22.

“To provide a more representative view of business performance, this deferred tax charge will be excluded from the underlying profit measures.

“We expect a small increase in group net debt at 30 September 2021 compared with the position as at 31 March 2021.

“This largely reflects the group’s ongoing investment in its asset base along with acceleration of capital expenditure to deliver service improvements sooner.

Our responsible approach to financial risk management continues to deliver benefits, including a strong balance sheet, a stable IFRS pension surplus and gearing within our target range supporting a solid A3 credit rating for United Utilities Water with Moody’s.”

Hargreaves Lansdown equity analyst Laura Hoy said: “United Utilities is keeping a steady course despite increasing headwinds.

“The group flagged inflationary pressure as a reason for rising costs and debt repayments.

“However those issues are expected to be mostly offset by an uplift in revenue as working from home and the reopening of many businesses come together to increase demand.

“The question now is whether this surge in demand is a permanent one and if inflation will continue to weigh on results or dissipate as expected.

“We suspect the rising costs are here to stay in the near-term, so UU will have to wait out the storm a bit longer.

“With a working from home hybrid model seemingly the new normal, an increase in demand could also stick around to see UU through a period of temporary inflation.

“The group’s been dealt another blow by the tax man, with a £380m charge related to the corporate tax hike to take a bite out of profits this year.

“This should be a one-time expense that doesn’t change the group’s underlying growth story.

“But it’s a sign of what’s to come for the rest of the UK businesses as they prepare to pay out a quarter of their income in 2023.“

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Mark McSherry
Dalriada Media LLC sites are edited by veteran news journalist Mark McSherry, a former staff editor and reporter with Reuters, Bloomberg and major newspapers including the South China Morning Post, London's Sunday Times and The Scotsman. McSherry's journalism has also appeared in The Washington Post, The Guardian, The Independent, The New York Times, London's Evening Standard and Forbes. McSherry is also a professor of journalism and communication arts in universities and colleges in New York City. Scottish-born McSherry has an MBA from the University of Edinburgh and a Certificate in Global Affairs from New York University.