National Grid (NG.) Ord 12, 204/473p

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National Grid’s first-half revenue fell by 11% to £7.1bn, driven by the sale of its Electricity System Operator to the UK government. Excluding this, revenue was broadly flat.

Underlying operating profit moved 13% higher to £2.3bn (£2.2bn expected), ignoring exchange rate impacts. Growth was driven by a strong US performance and higher allowed revenues in UK Transmission, partially offset by reduced allowances in UK Distribution.

Despite a step-up in investment, improved profitability meant that free cash outflows improved from £1.4bn to £0.8bn. Net debt increased by £0.5bn to £41.8bn over the first half.

Full-year guidance has been reiterated, with underlying earnings per share (EPS) expected to grow by 6-8%.

An interim dividend of 16.35p per share was announced.

The shares were broadly flat in early trading.

Our view

National Grid managed to deliver slightly better-than-expected profits over the first half, losing a chunk of its revenue from the sale of its Electricity System Operator business to the UK Government.

Work is well underway for National Grid to plant itself at the heart of the electric revolution. Infrastructure investment is set to rise sharply to around £60bn over the five years to March 2029 - nearly double the previous five-year total. Record levels of investment over the first half, up 10%, highlight the group's commitment to being a key part of the rapidly evolving energy landscape.

Alongside this, the portfolio is being streamlined, with a few non-core assets, including the renewables arm, being offloaded. These deals will free up cash for reinvestment and allow management to focus more fully on expanding energy infrastructure.

The dividend’s been rebased lower to help fund these growth plans and prevent pressure on the balance sheet. Despite this, there’s still a respectable 4.2% forward dividend yield on offer. But as always, no shareholder returns are guaranteed. We have no concerns about balance sheet health, but the rebase points towards more of a focus on long-term growth rather than short-term returns, which we’re supportive of.

In return for investing those billions to maintain and upgrade its infrastructure, regulators allow National Grid to earn a reasonable profit, with the potential to earn more if it exceeds targets. That translates into predictable revenues, low borrowing costs, and relatively resilient growth.

The regulatory environment can be a double-edged sword, though, as regulators have the final say over National Grid's profit potential. Tight consumer budgets and high energy costs mean many consumers are struggling to pay their bills. That's keeping pressure on regulators to start slicing into utilities' profits, which could potentially hold back future growth.

Given the group's significant investment in this current higher-rate environment, we've been keeping a close eye on the cost of funding it all. Finance costs are expected to rise by around £40mn this year last we heard, due to the increased levels of debt, but that looks well covered for now.

We commend National Grid’s willingness to pounce on shifting energy trends. Should management pull it off, investors will likely be rewarded for their patience. However, the sheer scale of the investment plans brings plenty of execution risk, so there’s likely to be some volatility along the way.

Environmental, social and governance (ESG) risk

The utilities industry is high-risk in terms of ESG. Management of these risks tends to be strong, with European firms outperforming their overseas counterparts. Environmental risks like carbon emissions, resource use and non-carbon emissions and spills tend to be the most significant risks for this industry. Employee health and safety and community relations are also key risks to monitor.

According to Sustainalytics, National Grid’s management of ESG risk is strong.

Its reporting of ESG issues is strong. There is a robust health and safety management system in place that includes regular employee training and system audits, with a strong contractor safety track record. While the group has maintained high levels of reliability on all its networks in the UK and US, there have been instances of outages leading to regulatory investigations and fines.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. 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.

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