With heavy rain, results and Ofwat recommendations, water has been in the news a lot.
Interim results from three of the UK's major utilities companies were in this week, and it would be hard to say they were any more exciting than tap water itself. But then, some of the best long-term investments are in companies that do dull stuff, but keep doing it well for decades. So how do they shape up?
Starting small...
Northumbrian Water Group (LSE: NWG) was the first to report, on Monday, and the numbers looked fine, if dull. Revenue (£351m vs £348m), pre-tax profits (£87m vs £77m), adjusted EPS (12.8p vs 10.8p), and interim dividend (4.39p vs 4.29p) were all plodding in the right direction.
However, the company recorded a net debt at the interim stage of £2.3bn, up a bit from the previous year's £2.2bn. At the current share price, that is considerably larger than Northumbrian's market capitalisation of just under £1.4bn.
The prospective P/E for the full year is looking to be around 11.2, and a dividend yield of almost 5% is expected.
A bigger one...
On Tuesday, it was the turn of Severn Trent (LSE: SVT) to report, and the company showed quite an impressive increase in profits. Although revenues only rose by 4.6%, to £852m, pre-tax profit soared by 50% to £208m, and adjusted basic earnings per share bobbed up by 21%. The interim dividend, however, has only been increased by a cautious 1.6%, and shareholders will receive 26.7p per share.
Chief Executive Tony Wray was positive about the results, and told us that the company is on track to achieve its expectations for the end of the year, including meeting the cost savings targets that the company set in May.
Again, like all of these water companies, Severn Trent is carrying a lot of debt, with a net debt of £3.5bn on its books as of 30 September. And again, that is quite a bit higher than the company's market cap of a little under £2.5bn.
Forward P/E for the full year currently stands at 10.5, rising to 13 for the following year, and the expected dividend yield is over 6%.
And the biggest...
United Utilites (LE: UU), the biggest of the three, was the last to report, posting interim results on Wednesday, and the numbers were again less than riveting. Turnover, at £1.2bn, was flat, coming in at the same level as the first half last year, but unadjusted pre-tax profit fell sharply, from £305m to £206m.
However, the figures did include contributions from two holdings that the company has since divested itself of, Northern Gas Networks and Manila Water Company, and adjusting for those suggests underlying profit before tax would have been around £268m, compared to £253m last year (and trying to make sense of that calculation illustrates how tricky it is to value large companies with complicated holdings).
In line with the company's stated policy, the interim dividend has been increased by 5% to 11p per share -- though personally, I'd prefer a policy whereby dividends are increased only in line with actual increases in profits and cashflow.
And net debt? At September 30, it stood at £4.9bn, against a market cap of under £3.3bn.
Forecasts put United Utilities on a forward P/E of about 8 for the full year (but that looks set to rise to over 11 for 2011 on the back of lower expectations).
Regulation?
But what of this week's Ofwat ruling on water bills? The regulator had been expected to order cuts in average annual charges of £14. However, in a move that was kinder to the water companies and harder on consumers, bills will only have to come down by £3, to an average of £340, between 2010 and 2015.
But although that will probably be seen as good news for shareholders in the utilities sector, operating in a heavily-regulated market is almost always bad news for companies. Without the flow of the free market and free competition (which is somewhat impossible when various water companies have their own geographic markets sewn up), it is very hard to work out rational valuations for shares. That places added risk on investments in such companies, and should lead to lower share prices as compensation.
So for that reason, and because of the high levels of debts carried by all three of these companies, I reckon they're all over-priced right now -- even if Ofwat did go easy on them.
More from Alan Oscroft:
