National Grid Plc

National Grid Plc (LON: NG.) is a London, United Kingdom-based electricity, and gas utility Company. The Company operates in the United Kingdom and the United States, focusing on transmission and distribution activities.

The Company will release full-year 2021 results on 20 May 2021.

Investment Highlights – National Grid Plc – Buy at GBX 892.20

• The Company do not expect any further significant deterioration on the economic outlook for remaining FY2021.
• During the first half of the financial year 2021, the Company delivered reliable networks throughout the COVID-19 pandemic, while the construction of three interconnectors remained on track.
• As per valuation metrics, Price/Book Value and Price/Cash Flow multiples of the National Grid Plc are currently lower as compared to the corresponding multiples of the Multiline Utilities industry. It reflects, shares are undervalued as compared to the industry.
• From the technical standpoint, shares were trading above the short-term support level of 200-day (GBX 882.20) simple moving average prices, which reflects an uptrend in the stock.

Key Risks

• The business performance is exposed to political and economic uncertainty resulting from COVID-19.
• Delay in projects, network failures, and disruption in energy supply can also affect the growth trajectory.

Financial Highlights – H1 FY2021 (30 September 2020) (released on 12 November 2020)

(Source: Interim Report, Company Website)

• In the first half of the financial year 2021, underlying operating profit declined by 12%, while statutory operating profit surged by 13%.
• The underlying EPS was down by 14% to 17.2 pence due to Covid-19 related costs, including UK bad debts, albeit it was partially offset by improved UK Gas Transmission and US revenues.
• The Company’s statutory EPS surged by 51% to 17.1 pence, reflecting mark-to-market remeasurement gains.
• The Company reported an interim dividend of 17.0 pence per share in accordance with the policy.

One Year Share Price Chart

(Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The Company has shown an improvement in the first half of the financial year 2021, with higher profitability margins. NG expects that covid-19 disruption will impact the underlying operating profit by nearly £400 million in FY2021, due to higher levels of bad debt, additional direct COVID-19 costs, and a shortfall of revenue under existing regulatory agreements. Moreover, the Company expects the economic impact to be short term. National Grid continued to expect asset growth towards the top end of its target range of 5-7% in the near term, assuming RPI at 3%. With an efficient balance sheet that underpins asset and dividend growth, the Company is well-positioned to create value for shareholders. Stock 52-week Low and High were GBX 805.40 and GBX 998.80, respectively.

Based on the factors discussed above, we have given a “BUY” recommendation on National Grid Plc at the current price of GBX 892.20 (as on 14 April 2021 at 9:37 AM GMT) with lower double-digit upside potential based on 19.75x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

Rolls-Royce Holdings Plc

Rolls-Royce Holdings Plc (LON: RR.) is a London, United Kingdom-headquartered multinational engineering Company. It focuses on power and propulsion systems.

The Company will hold 2021 AGM on 13 May 2021.

Investment Highlights - Rolls-Royce Holdings Plc – Avoid at GBX 108.00

• Due to the impact of the covid-19 pandemic, the group’s performance is severely impact along with near-term outlook.
• In the last one month, the Company delivered a negative return of ~8.59% and delivered lower returns compared to the benchmark Index (FTSE-100 Index).
• As per valuation metrics, EV/EBITDA and Price/Cash Flow multiples of the Rolls-Royce Holdings Plc are currently higher as compared to the corresponding multiples of the Aerospace & Defense industry, reflecting overstretched valuations.
• From the technical standpoint, shares were trading below the short-term support level of 20-day (GBX 111.42) simple moving average prices, which reflects a downtrend in the stock and can decline further.

Key Risks

• COVID-19 is causing substantial disruptions to the respective supply chains and the end markets, while the customer demand is shrinking as activity levels have reduced.
• The Group is exposed to a number of market risks, some of which are of a macro-economic nature such as, fluctuations in foreign currencies, oil prices, and interest rates.

Financial Highlights – FY2020 (31 December 2020) (released on 11 March 2021)

(Source: Annual Report, Company Website) 

• For the financial year 2020, due to the lower activity level due to covid-19 pandemic, the revenue declined on both underlying and reported basis to £11,763 million and £11,824 million.
• Due to the covid-19 related charges, the profitability for the period declined significantly. The Company reported loss for the period of £3,169 million on reported basis and £3,997 million on underlying basis.
• The Company has a total liquidity of £9 billion as on 31 December 2020 and secured additional liquidity of £7.3 billion in FY2020.

One Year Share Price Chart

(Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

The Company has shown a significant decline in financial performance in the financial year 2020. The revenue for the period declined and profitability margins entered the negative zone. The covid-19 pandemic has a significant impact on the Company’s Civil Aerospace business. To tackle the impact of pandemic, RR took immediate actions such as reduced cost base, consolidated global manufacturing footprint and launched a restructuring programme. Despite all the measures taken to improve financial and operational performance, the near-term outlook remained uncertain and highly sensitive. Stock 52-week Low and High were GBX 34.59 and GBX 146.46, respectively.

Given the heightened level of uncertainties, we recommend an “Avoid” recommendation on Rolls- Royce Holdings Plc at the current price of GBX 108.00 (as on 14 April 2021 at 8:21 GMT), while we look for further improvement in operational performance through restructuring programme.

*Dividend Yield may vary as per the stock price movement.

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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