National Grid PLC - Balanced portfolio to deliver asset growth and sustainable dividend

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.

Investment Rationale – Buy at GBX 851.00

• Over the past ten half-years, EBITDA margin and net margin have remained above 29.10% and 6.20%, respectively, which are substantially higher than the industry median.
• From a technical standpoint, 14-day RSI (34.66) is supporting the upside potential.
• During H1 FY21, the Company delivered reliable networks throughout the COVID-19 pandemic, while the construction of three interconnectors remained on track.
• The full-year guidance remained unchanged, and thus, the Group is well positioned to manage the ongoing Covid-19 uncertainty.

Risk Assessments

• The business performance is exposed to political and economic uncertainty resulting from COVID-19.
• Any breach in environmental, climate change and health and safety laws or regulations can cause significant penalties or liabilities.
• Delay in projects, network failures, and disruption in energy supply can also affect the growth trajectory.

Recent News

10 December 2020: National Grid announced Paula Rosput Reynolds will succeed Sir Peter Gershon as Chair of the Nominations Committee with effect from 1 January 2021.

Half-Year Results for period ended 30 September 2020 (as on 12 November 2020)

 (Source: Company Website)

• During H1 FY21, underlying operating profit was down by 12% year-on-year to £1.1 billion.
• 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 capital investment of £2.6 billion in H1 FY21 was down by 6% year-on-year.
• Further, the Company reported an interim dividend of 17.0 pence per share.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

In FY21, the Company expects that COVID-19 disruption will impact the underlying operating profit by nearly £400 million, as it is anticipating higher levels of bad debt, additional direct COVID-19 costs, and a shortfall of revenue under existing regulatory agreements. However, it also projects to recover a large part of this with regulatory mechanisms and precedents. Moreover, economic impact is not likely to happen for the longer term. It is working with US regulators to develop the appropriate rate plans for a post COVID-19 world. 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 Group is well positioned to create value for shareholders. Stock 52-week High and Low were GBX 1,073.80 and GBX 789.13, respectively.

Based on the factors discussed above, we have given a “Buy” recommendation on National Grid PLC at the current market price of GBX 851.00 (as on 23 December 2020, before the market close at 8.10 AM GMT) with lower double-digit upside potential based on 19.93x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

Centrica PLC – Well-positioned to navigate through uncertainties.

Centrica PLC (LON: CNA) is a global energy solutions and services provider, which concentrates on satisfying the changing needs of the clients and enabling the changeover to a lower-carbon future.

Investment Rationale – Buy at GBX 42.48

• From a technical standpoint, 50-day SMA (40.52) is supporting the upside movement.
• In terms of valuation metrics, EV/Sales, EV/EBITDA, Price/Earnings, and Price/Cash Flow multiples are quite undervalued against the industry median.
• Centrica has leading positions in energy supply, services, and solutions for both residential and business customers.
• The disposal of Direct Energy will simplify Centrica’s business, while the Company has a stable financial profile.

Risk Assessments

• The deteriorated demand in gas amid the COVID-19 restrictions has led to commodity or gas price slump, which can affect the profitability in FY20.
• Any change in regulations and government policies could affect the overall business of the Company.
• Risks related to environment and climate change could hamper the operations of the Company.

Recent News

30 November 2020: Centrica noted that NRG Energy has received Federal Energy Regulatory Commission approval for the previously announced sale of Direct Energy to NRG. The transaction is expected to occur in early 2021.

Interim Results for six months ended 30 June 2020 (as on 24 July 2020)

(Source: Company Website)

• The Company has maintained good customer service levels, with continued high customer retention.
• CNA showed robust cash flows and liquidity, with a decrease in net debt of £0.4 billion against the start of the year.
• On a year-on-year basis, the adjusted operating cash flow and free cash flow increased by 34% and 74%, respectively.
• Overall, it delivered a resilient performance in H1 FY21 against the backdrop of Covid-19.
• No interim dividend was declared by the Company.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

Post selling Direct Energy, Centrica has a strong market position, and it is now operating as a leaner, simpler and more modern entity. Moreover, Centrica delivered a resilient performance against the unprecedented backdrop of the Covid-19 crisis during the first half of the year. The bottom-line performance has improved but remained in the negative zone for the period.  It assumes an increasing trend in the second half of the financial year 2020. Centrica has a strong market position in the UK & Ireland. With the ease in lockdown, it has shown a recovery in demand for energy and normal sales level of services and solutions in the core market. The stock made a 52-week low and high of GBX 29.10 and GBX 94.09, 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 Centrica PLC at the current market price of GBX 42.48 (as on 23 December 2020, before the market close at 8:05 AM GMT), with lower double-digit upside potential based on 3.60x Price/NTM Cash Flow (approx.) on FY20E Cash Flow Per Share (approx.).

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

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

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