Company Overview
National Grid Plc (NG) is a United Kingdom-based global electricity and gas company engaged in the transmission and distribution of electricity and gas. The company operates in the UK, US and North Eastern countries.

Power Cut Inquiry
Recently, the British government has invoked an inquiry into the power cut on Friday on National Grid and business secretary Andrea Leadsom asked National Grid to review and report to Ofgem urgently. Meanwhile, the Ofgem has already demanded a detailed report from the company to understand exactly what went wrong and also intimidated it with enforcement actions. The incident that took place on August 09, 2019, left thousands of people stuck in trains for almost nine hours and left millions of people in England and Wales without electricity.
In response to questions raised by Ofgem, National Grid replied that power cut happened mainly because of failure of two large generators. It also mentioned that Electricity System Operator (ESO), a legally separate business within National Grid Group Company, responsible for maintaining a balance between supply and demand, was conducting its own inquiry.

Recent development
On June 06 2019, the company announced that the optional scrip dividend per share of the company, allowing shareholders to obtain new fully paid ordinary shares, instead of a cash dividend was available to the shareholders on record as on 31^st May 2019. In FY19, the final scrip dividend per share reference price was 789.74 pence for the ordinary shareholders, and the scrip ADR final dividend per share reference price was US$49.9866 for American Depositary Receipt (ADR) holders.

Financial Highlights (FY2019, £million)

Source: Company filing.

During the year under consideration, the company’s reported revenues from continuing operations slumped by 2.1% to £14.9bn against £15.2bn recorded in the year-ago period, due to the decline in the UK Electricity transmission and UK Gas Transmission segments but increased in the US Regulated segment.
 
The company’s statutory results for the financial year 2019 were impacted by exceptional charges incurred with respect of the dispute in Massachusetts Gas labour, the US and the UK restructuring programmes and cost efficiency, and impairment of development costs in respect of the termination of the Horizon nuclear connection and NuGen projects. In the previous year, statutory results increased from the decrease in deferred tax provisions. Underlying operating profit declined by 2 per cent to £3.4bn against the £3.5bn in FY18, was impacted by the tax reform on US regulated revenues and return of certain UK Gas Transmission revenue allowances. Underlying profit before tax surged by 3 per cent to £2bn as compared to that of the financial year 2018. Adjusted earnings per share increased by 7 per cent to 59 pence as compared to 55.3 pence in FY18. Underlying earnings per share stood at 58.9 pence, an increase of 5 per cent as compared with the previous year data.

Stock Performance

Daily price chart (as on August 14, 2019), before the market close. (Source: Thomson Reuters)

National Grid Group Plc's shares pared some losses of August 13, mainly led by power cut inquiry put on the company by Ofgem and trading 8.1 points or 0.8% higher in early hours of August 14 and quoting at GBX 844.2 respectively. In the year-ago period, its shares have registered a 52w high of GBX 892 and GBX 744.50, respectively.

Valuation Methodology


Conclusion
The company has continued to make decent operational progress in the FY19 while maintaining decent levels of reliability and safety. The group’s board supports prospects to embrace and adopt innovation and technology as the UK ESO (Electricity System Operator) now uses artificial intelligence to improve capture of solar energy  and wind output, and the US gas businesses now offer innovative data to the field strength and use technology to increase work schedule. US business is set to improve as the company has received several rate cases recently, which will improve returns and also increase the Rate Base from the last 3-years.

Also, from the technical standpoint, the stock has reversed and a registered an uptrend and has started trading above the middle Bollinger Band®, which is a positive technical measure. Also, the 5-day RSI has reversed into the neutral zone and strengthening along with the upward movement of the stock.

Also, amid growing uncertainties over the global recession and Brexit related uncertainties, the utility stocks are considered as a safer investment picks during the tough times, because consumers may reduce their spending on discretionary items, but they will keep paying their electricity bills, water bills and other utility payments. Also, the company is offering attractive dividend yield, as at the current trading level, the dividend yield of the LSE: NG stood at 5.49%, which is about 100bps higher than the FTSE 100 dividend yield of 4.47% respectively.

Therefore, based on the above discussion and valuation done using the above methodology, we have given “Hold” recommendation at the closing price of GBX 837.10 (as on August 13, 2019), based on the 14.7x NTM Peer’s Average Price-to-Earnings Multiple (approx.) on the FY20E EPS(approx.).

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