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National Grid - Investment up as storms and taxes upset profit

Nicholas Hyett | 8 November 2018 | A A A
National Grid - Investment up as storms and taxes upset profit

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

National Grid Ord 12, 204/473p

Sell: 956.10 | Buy: 956.40 | Change 0.00 (0.00%)
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Half year results saw underlying operating profits fall 6%, to £1.3bn, in a messy set of results with lots of one offs. The profit fall mainly reflects tax reforms in the US and storm related damage, most of which is recoverable through regulatory mechanisms.

The interim dividend rose 3.8% to 16.08p per share.

The shares rose 1.1% following the announcement.

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Our view

Demand for what National Grid does isn't going to go away this side of the next Dark Age. As the owner and operator of essential electricity and gas infrastructure across the UK and north-eastern US, the company is vital to keeping the lights switched on and homes and businesses heated.

Unsurprisingly, its markets are tightly regulated.

Each year it's required to invest billions on maintaining and upgrading its infrastructure. In return, it's entitled to earn a reasonable profit, with the potential to earn more if it exceeds regulatory targets. This business model results in highly predictable revenues and low borrowing costs, both of which underpin the group's ability to pay regular dividends.

National Grid's aim is to grow the full year dividend by at least the rate of RPI inflation, and the shares currently offer a prospective yield of 5.7%.

While the company is stepping up capital expenditure and growing the US asset base, the potential for rapid growth is limited. To be honest though, utilities were never meant to be anything but steady.

Its defensive qualities proved attractive amid economic uncertainty, while the income potential means it's proven a popular destination for bond investors seeking higher yields in a low-interest rate world.

But things are changing. UK interest rates may not be rising fast, but the US has increased rates from 0.5% - 2.25% in just two years. That's starting to weigh on the share price. Rate rises push up the relative appeal of other income-generating assets like bonds meaning National Grid will have to work harder to keep up its appeal.

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Half year results

National Grid stepped up capital investment to £2.1bn, 7% ahead of the previous year. That reflects maintenance spending on existing assets, upgrades to the US network and increased investment in two large, deep-sea power cables. The sale of the remaining stake in UK gas transmission business Cadent is expected to complete in July. Proceeds from the sale are expected to be £2bn and will be reinvested.

Group net revenue remained flat at £3.9bn, as US growth offset declines in the UK Gas business. The group expects revenue growth in all segments, bar UK gas, by the end of the year. In the US this is expected to be driven by recently renegotiated rates and inflationary increases in the UK.

The Ventures business is making good progress on four interconnector projects, with a total combined investment of over £2.1 billion. They are expected to contribute approximately £250 million in EBITDA (earnings before interest, tax, depreciation and amortisation) when fully operational in the mid-2020s.

Group net debt increased by £2.6bn to £25.6bn, with exchange rates contributing £1.4bn to the increase.

National Grid is set to achieve annual asset growth towards the higher end of 5-7% target range over the medium term and at least 7% for the next two years.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.