2019Q4 Index Release (Erratum)

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2019Q4 Index Release (Erratum)

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January 25, 2020 7:24 am

In the 2019Q4 Index Release made on January 16, 2020, it was mentioned that South East Water suffered a negative return in the 4th quarter of 2019 due to a “revision of its financial forecast.”

This statement was not accurate on two counts:

  • The forecast in question is produced by EDHECinfra’s cash flow models and analyses but was not produced or provided by South East Water.
  • While our own analysis did lead to a revision of the financial forecast of this company in 2019Q1 (due to higher borrowing), we wish to amend the January 16 release to clarify that the main cause for the negative return in that quarter was not due to a drop in expected dividend between Q3 ands Q4 (which were unchanged), but to an increase in the term structure of the discount rates applied to this firm, itself the result of changes in long-term rates and risk premia.

This rate change affected all water utilities in the UK negatively in the quarter, albeit differently depending on their individual cash flow forecasts and risk premia. While quarterly returns were negative on the 4th quarter, they were positive on the year for UK water utilities due to combination of healthy dividends, falling rates and despite a slight increase in risk premia during the first 3 quarters. South East Water and Affinity Water end up being the best performers for 2019 for the same reasons that they were amongst the worst in Q4: higher duration (sensitivity to interest rate risk) due to higher expected dividend growth than other firms in the sector.

For more details, read our technical note here.