PETALING JAYA: The price review 2024 (PR24) draft determinations (DD) released by the UK water services regulator, Ofwat, has a mixed effect on water player Wessex Water, which is owned by YTL Power International Bhd
.
On July 11, Ofwat released its PR24 DD for the business proposals submitted by the water players for the upcoming new five-year regulatory period (AMP8) which starts in April 2025.
In a report, CGS International (CGSI) Research said among the key highlights relevant to Britain’s Wessex Water is a 80 basis point (bp) rise in allowed weighted average cost of capital (WACC) to 3.72%, while there would be a 2% reduction in customer bills in 2029-30 from the 2024-25 level.
Other highlights include a 34% reduction in total expenditure (totex), the business plan categorised as “inadequate” and more stringent dividend policies.
Sharing its initial take, CGSI Research said the higher allowed return is a key positive, while the lower allowed increases on customer bills and the categorisation of business plans as “inadequate”, which may result in a potential 30-bp penalty on return on equity, appear to be setbacks.
“That said, it is worth noting that these DD outcomes are subject to further negotiations with Ofwat until the final determination (FD) date which is set for Dec 19, 2024.
“We await clarity from YTL Power on how these DD outcomes might affect the FD, profitability of Wessex Water and dividends moving forward,” said CGSI Research in the report.
The research firm had also made a site visit to Wessex Water on July 6 and among the key takeaways was that the recent extreme weather fluctuations pose significant strain on UK water resources.
However, efforts are being undertaken to improve long-term water supply and these include reducing leakages, expanding smart metering, improving network connectivity and developing reservoirs using new solutions.
There has also been under-investment in the UK water industry over the past 25 years due to a focus on keeping customer bills low.
Wessex Water’s management said under AMP8, water players are pushing for increased investments in water infrastructure, and to minimise the impact of the corresponding bill hikes, the company is looking to expand its social tariffs to support more lower-income households.
“At current levels, we believe YTL Power’s existing utilities operations are fairly valued, while we estimate investors have baked-in RM12bil in value for its new data centre (DC) investments.
“We keep our ‘hold’ call as we maintain the view that take-up rates for YTL Power’s DCs need to pick up meaningfully and details on these projects need to be disclosed to justify a further re-rating of the stock,” said the research firm.
