National Grid (NG.) Ord 12, 204/473p
HL comment (2 April 2020)
National Grid's full year results are expected to be in line with guidance given in November's half year results. US operating costs will be higher but this is expected to be offset by lower than expected finance expenses. The group now expects to report its full year results in mid-June.
The group has seen no material impact from COVID-19 on its business, but is starting to see some delays and disruption to its capital projects. The group has stopped all debt collection and termination of customer accounts in the US, and this may lead to higher bad debts and lower customer receipts.
National Grid reported it had £5.5bn in undrawn committed credit facilities.
The shares were broadly fla t following the announcement.
It's at times of crisis that the usually unexciting world of utilities comes into its own. National Grid is no exception. 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.
In return for investing billions maintaining and upgrading its infrastructure, regulators allow National Grid to earn a reasonable profit, with the potential to earn more if it exceeds targets. This results in predictable revenues and low borrowing costs, and underpins the group's ability to pay regular dividends.
While lockdowns and social distancing measures look set to disrupt capital investment plans, potentially restricting revenue growth in the short term, the main business is generally chugging along as usual. The move to delay rate rises in the US and an increase in bad debts would be minor headaches in the current environment.
We do have some longer term concerns about interest rates. In recent years National Grid's income-paying potential has helped it become a popular destination for bond investors seeking higher yields in a low-interest rate world. Rates are at an all-time low at the moment, but if we start to see increases, the appeal of dividend paying stocks like National Grid is reduced.
Having said that, rates look set to stay low for years to come. And with coronavirus uncertainty wreaking havoc with companies it's no surprise National Grid shares have so far held up rather well. The fact National Grid is confident it can take tens of millions out of the cost base from efficiency measures, both here and in the US, should bring further assurances.
Going into the current crisis National Grid had been aiming to grow the full year dividend by at least the rate of RPI inflation. Analysts currently expect a prospective dividend yield of 5.5%, and as things stand we think the dividend remains affordable. That makes it the group's main attraction, although no dividends are guaranteed and National Grid's plan could yet change if the coronavirus outbreak becomes more disruptive.
Half year results (constant currency figures used, 14/11/19)
First half underlying operating profits fell 0.5% at constant currency, to £1.3bn, although National Grid's US business continues to perform strongly.
The group announced an interim dividend of 16.57p per share, 3% ahead of last year.
In the US, underlying operating profits rose 16% to £525m. Higher revenues from an increase in rates and lower storm costs contributed to the rise, but were partly offset by increased depreciation costs.
UK Electricity Transmission saw operating profits rise 5% to £583m, reflecting inflationary increases in revenues. National Grid expect profits to be slightly higher in the second half and the group still expects to deliver Return on Equity (ROE) outperformance of 2-3 percentage points.
Operating profits in Gas Transmission fell 27% to £66m, the result of lower net revenues from reduced capacity on the gas network. ROE is still expected to be around the allowed level for the full year.
In the Ventures business all three interconnector projects remain on track. Operating profits in this business fell 39% to £127m.
National Grid increased capital investment by 24% to £2.7bn in the first half. That reflects upgrades to the US network, maintenance spending on existing assets, and the acquisition of Geronimo, a US based wind and solar developer , for £209m. For the full year capital investment is expected to be near £5bn contributing to annual asset growth at the top end of the 5 - 7% range.
Over the first six months net debt increased by £1.3bn to £27.8bn. Exchange rates were the key contributor to the rise and, together with a change in how National Grid accounts for leases, were only partially offset by the £2bn sale proceeds from Cadent.
National Grid remains on track to deliver £50m cost savings in the UK and $30m in the US.
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.
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