United Utilities: Shares Look Cheap Despite Nationalization Fears

Key Morningstar Metrics for United Utilities Group

• Fair Value Estimate
  : GBX 1,650
• Morningstar Rating
  : ★★★★★
• Morningstar Economic Moat Rating
  : None
• Morningstar Uncertainty Rating
  : Low

Despite improving fundamentals under the 2025-30 regulatory period, AMP8, United Utilities’ market valuation is impaired by political risk, high UK government bond yields, and AMP7 underperformance versus peer Severn Trent.

Why it matters: Andy Burnham, appointed on July 20 as the UK prime minister, said he wants to put the water industry under stronger public control and asked United Utilities to cancel its dividend next August.

• We believe Burnham has limited leeway. Primary legislation to constrain dividends would take months and face legal challenges under the Human Rights Act property protections. Any move toward public ownership would require compensation and substantial public funding.
• Should they persist, current high yields will boost allowed returns under 2030-35 AMP9. Underperformance under AMP7 was driven by temporary headwinds. We expect the group to achieve a real return on equity of 8.8% under AMP8, exceeding its guidance by 0.5% and narrowing the gap with Severn Trent.

The bottom line: We confirm our GBX 1,650 fair value estimate for no-moat United Utilities. The current share price implies an enterprise value/regulated capital value of 1.05, closer to Pennon Group’s 0.97 than Severn Trent’s 1.17, despite returns and growth profiles much closer to the latter.

• No material intervention under Burnham and demonstrated return outperformance at fiscal 2027 results should help to close United Utilities’ valuation gap.

Long view: Under 2025-30 AMP8, we project adjusted EPS to grow by 22% annually, thanks to the largest regulated capital value growth in more than a decade and higher returns.

• We expect hefty investments to persist under 2030-35 AMP9 due to a multiyear infrastructure pipeline for data centers around Manchester, urban development, and a long-term asset replacement program. This will drive an RCV compound annual growth rate of nearly 8% under AMP9.