National Grid Plc

National Grid Plc (LON: NG.) is an FTSE 100 index listed electricity and gas utility Company founded in 1990 and headquartered in London, the United Kingdom. With operations under three segments, namely UK Electricity Transmission, UK Gas Transmission and the US Regulated, the Company operate across the United Kingdom and The United States.

The Company will release FY2021 results on 20 May 2021.

Investment Rationale for Valuation – Buy at GBX 912.00

• The Company improved both Operating Profit and EPS in H1 FY2021 YoY.
• The Company has received strong investment-grade credit ratings from Moody’s, S&P and Fitch. It has a strong balance sheet.
• The Company aims to increase its ordinary dividend per share each year in line with RPI inflation.
• In the last two years, the Company delivered a return of ~10.07% as of 5 May 2021. It is higher than the two-year return of the benchmark index ie the FTSE 100 index, which is ~-3.72% on the same date.
• Since FY2017, the Company maintained EBITDA margins and Net margins, which are higher than respective industry medians with an EBITDA margin median of 17.3% and Net margin median of 4.2%. It means the Company has a more robust operation and better cost savings as compared to the industry.
• On the technical front, the Company shares are trading above 200-day EMA (GBX 883.70). It indicates a potential uptrend in the stock.

Key Risks

• Operational challenges are pertinent to disruptive factors caused by the Covid pandemic.
• Regulatory risk related to future energy policies.
• Delay in projects, network failures and disruption in energy supply.
• Failure to respond properly to climate change could create disruptions in operations.
• US operations could have higher levels of bad debt as expected by the Company.

Recent News

Voting Rights: On 4 May 2021, the Company has 3,814,951,606 ordinary shares, of which 3,555,200,200 shares have voting rights.

Financial Highlights (for the six months ended 30 September 2020 (H1 FY2021), released on 12 November 2020)

(Source: Company Website)

• The Company delivered a strong operational performance in H1 FY2021 despite Covid headwinds. Revenue was up ~4% YoY in H1 FY2021 to £6,535 million.
• Driven by an increase in the top line, operating profit was up by ~13% YoY. It also led to a significant rise in net profit which was up by ~55% YoY.
• Driven by its cash savings in H1 FY2021, the Company had its cash positions up by ~124.7% in H1 FY2021.
• This cash accretive operations allow the Company to maintain its dividend policy of increasing its dividend per share each year. In H1 FY2021, the Company offered an interim dividend of GBX 17.0 per share as compared to GBX 16.57 per share in the prior period.

One Year Share Price Chart

(Source: Refinitiv, Thomson Reuters)

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

Conclusion

The Company aims to deliver value to shareholders through maintaining a portfolio of businesses with strong operational performance. The management also wants to maintain a strong balance sheet which would provide financial flexibility so that the Company could raise funds for its investment programmes. While the management expects some impact from Covid-19 on its operating profit, the strong balance sheet should drive its future dividend policy in line with the past.  National Grid continues to expect asset growth towards the top end of its target range of 5-7% in the near term. The stock made a 52-week low and high of GBX 805.40 and GBX 998.80, respectively.

Based on the above factors and support from valuation as done using the above method, we have given a “BUY” recommendation on National Grid Plc at the current market price of GBX 912.00 (as on 5 May 2021 at 3.20 PM GMT), with a lower double-digit upside potential based on 17.50x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

SSE Plc

SSE Plc (LON: SSE) is an FTSE 100 index listed electricity Company founded in 1989 and headquartered in Perth, the United Kingdom. The Company has its operations in three segments, namely Wholesale, Networks and Retail, and engaged in the generation, distribution and supply of electricity.

The Company will declare its preliminary results for the year ended 31 March 2021 on 26 May 2021.

Investment Rationale for Valuation – Buy at GBX 1,456.00

• The Company has a robust business model which mitigates the impact of macro-economic headwinds generated from the Covid-19 pandemic.
• The Company’s disposal programme is on track to create substantial value, and it has strong operational performance and significant growth opportunities.
• In November, SSE was chosen as a principal partner of the COP26 summit and has the opportunity to work with the UK and other governments, which gives the Company great exposure.
• Since FY2020, the Company has an efficient operation and cost savings compared to the industry. It led to the Company having a higher EBITDA margin (industry median: 22.3%) and net margin (industry median: 7.0%) than the industry.
• In the last two years, the Company delivered a return of ~25.84% as of 5 May 2021. It is higher than the two-year return of the benchmark index ie the FTSE 100 index, which has a negative return on the same date.
• On the technical front, the Company shares are trading above 200-day EMA (GBX 1,404.6). It indicates that the stock price could go upwards in the short term.

Key Risks

• Since the Company generates power, its operations could affect the natural environment.
• There are regulatory risks related to future energy policies.
• There could be disruption in energy supply and also network failures.
• Failure to respond properly to climate change could create disruptions in operations.
• Alternative sources of power could pose significant risks to the Company’s future margins.
• An increase in dividend policy could put pressure on the Company’s liquidity.

Recent News

Voting Rights: On 4 May 2021, the Company has a share capital of 1,049,144,208 ordinary shares. However, among those shares, 1,043,106,591 shares have voting rights.

Contracting Division Sale: On 1 April 2021, SSE Plc announced that it had finalized to sell its Contracting business to the Aurelius Group for £27.5 million.

Q3 FY21 Trading Update (released as of 2 February 2021)

• With efficient planning and strong strategic execution, the Company made solid progress on its five-year, £7.5 billion investment and capital expenditure plan.
• It has a strong balance sheet and liquidity position, which enables it to offer a full-year dividend of GBX 80.00 per share and also target an annual increase till 2023.
• The Company has the opportunity to work with the UK and other governments on climate change and to achieve net-zero emissions.
• The Company has gained from 10% stake sales on Dogger Bank, which improves its liquidity position.
• Its construction of Viking onshore and Seagreen offshore wind farms continues. Completion of these ventures would diversify the business.

One Year Share Price Chart

(Source: Refinitiv, Thomson Reuters)

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

Conclusion

Depending on normal weather conditions and the expected impact of Covid-19 on operating profit, the Company aims to deliver adjusted earnings per share in the range of GBX 85 to 90. Favourable weather conditions improved the shortfall in output from renewable sources from 5% below plan for the nine months to 31 December 2020, to around 9% below plan as of 23 March. The Company intends to propose a full-year dividend per share of GBX 80.00 plus RPI for FY2021, and the dividend was in line with a five-year dividend plan till 2023. The Company is in collaboration with the UK and other governments to achieve net-zero emissions. The stock made a 52-week low and high of GBX 1,069.00 and GBX 1,622.00, respectively.

Based on the above factors and support from valuation as done using the above method, we have given a “BUY” recommendation on SSE Plc at the current market price of GBX 1,456.00 (as on 5 May 2021 at 8.50 AM GMT), with a lower double-digit upside potential based on 18.31x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

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

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

Disclaimer

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332. Kalkine Limited is authorised and regulated by the Financial Conduct Authority under reference number 579414.

The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated. Kalkine does not intend to exclude any liability which it is not permitted to exclude under applicable law or regulation.

Kalkine does not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not intend to exclude any liability which it is not permitted to exclude under applicable law or regulation. Kalkine’s non-personalised advice does not in any way endorse or recommend individuals, investment products or services for your personal financial situation. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional authorised financial planner and adviser. You should be aware that the value of any investment and the income from it can go down as well as up and you may not get back the amount invested.