United Utilities – Inflation, Legislation Threaten Profits

United Utilities – Inflation, Legislation Threaten Profits
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United Utilities Group PLC (LON:UU)’s revenue in the first six months of the year is forecast to rise 4% compared to last year. This reflects higher consumption as more people work from home and businesses resume operations following lockdowns, only partially offset by regulatory revenue reduction.

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Coupled with cost-saving initiatives this should lift underlying operating profit, though it will be somewhat offset by inflationary pressure. This doesn’t include a £380m one-time tax charge due to new tax legislation.

The group expects a small increase to net debt, reflecting increased infrastructure investments.

The shares were broadly flat following the announcement.

United Utilities Is On A Steady Course

Laura Hoy, Equity Analyst at Hargreaves Lansdown:

“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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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver
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