National Grid Plc – Shown solid performance in both the UK and US regions

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

On 20 May 2021, the Company will announce the full-year results for the financial year 2021.

Rationale for Valuation – Buy at GBX 870.93

• As per valuation metrics, EV/EBITDA and Price/Cash Flow multiples are currently lower than the Multiline Utilities industry.
• In October 2020, S&P affirmed “BBB+” issuer debt rating, with a stable outlook on NG.
• The Company has decent fundamental metrics as it has maintained a profitability margin above than the industry median.
• From the technical standpoint, 14-day RSI stood at around 42.75, which is supporting the upside movement.

Key Risks

• The Company is exposed to a fundamental change to the regulatory framework, which can have an adverse impact on the business and economic model.
• The Company operates in multiple geographies, and its profits can be impacted negatively due to the foreign exchange rate fluctuations.
• There are significant operational risks associated with Covid-19 related restrictions, geological and weather conditions.

Recent News

On 8 December 2020, the Company stated that Ofgem had published the Final Determination for the RIIO-2 framework, which is covering the UK Electricity and Gas Transmission businesses for April 2021 to March 2026, and also the Electricity System Operator.

On 3 December 2020, the Company announced the scrip dividend reference price for the 2021 interim dividend per share was 864.44 pence.

Financial Highlights (for the period ended 30 September 2020 (H1 FY21), as on 12 November 2020)

(Source: Company Website)

• The Company delivered a strong operational performance in both the UK and US, with lost time injury frequency rates (LTIFR) trending down to 0.11 from the year-end LTIFR performance of 0.12.
• Overall, underlying performance has shown a decline in H1 FY21 results. Still, the statutory results show a performance improvement, with an increase in operating profit of 13% year-on-year, profit before tax of 78% year-on-year and earnings per share of 51% year-on-year.
• In H1 FY21, the Company continued to make a significant investment in energy infrastructure, with capital investment across the Group of £2.6 billion.
• The Board has declared an interim dividend per share of 17 pence and was in line with the dividend policy.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Conclusion

Despite the impact of COVID-19, the Company delivered a strong operational performance in H1 FY21. In the US, the Company continues positive discussions with the PSC (Public Service Commission) on new rates for KEDNY and KEDLI and has progressed a way forward on addressing gas constraints in New York. In the UK, Ofgem has published the Final Determination for the RIIO-2 framework. Further, the Company assumed Covid-19 underlying operating profit impact of around £400 million in FY21. It has also maintained the dividend policy and shown an increase of 2.6% year-on-year in dividend per share. Meanwhile, the business remained financially strong and has made good progress, with NG continuing to deliver strong and predictable cash flow generation. The stock made a 52-week low and high of GBX 789.13 and GBX 1,073.80, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on National Grid at the current market price of GBX 870.93 (as on 8 December 2020, before the market close at 12:08 PM GMT), with lower double-digit upside potential based on 10.00x Price/NTM Cash Flow (approx.) on FY21E cash flow per share (approx.). 

*All forecasted figures and Peers Information have been taken from Refinitiv, Thomson Reuters.

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

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