EUR 850.00 For Business Accounts Only

Morningstar | National Grid Releases 2019 Results in Line With Estimates; Shares Overvalued

We reiterate our GBX 780 fair value estimate and no-moat, stable trend ratings after National Grid released fiscal 2019 underlying results in line with consensus expectations, though slightly above ours. The regulatory backdrop in the United Kingdom remains highly uncertain with the upcoming returns cut in RIIO-2 and nationalisation threat from the Labour Party. The shares look overvalued.

Underlying EBIT decreased 2% to EUR 3.4 billion, in line with expectations but above our EUR 3.26 billion forecast. Underlying earnings per share grew 5% to GBX 58.9, slightly above consensus' GBX 57.8 and our GBX 56. The slide in EBIT was more than offset by a lower tax rate, cost of debt, and number of shares. On a reported basis, statutory EBIT dropped 18% to GBP 2.9 billion because of exceptional costs linked to the strike in the United States, restructuring costs, and impairment of nuclear connection development costs in the U.K. The group's return on equity decreased 50 basis points to 11.8%. The 2019 dividend is set at GBX 47.34 per share, up 3.1% and in line with expectations.

On the negative side, U.K. gas transmission's EBIT tumbled 32% to GBP 341 million on lower revenue allowances. U.S. regulated activities' EBIT decreased 10% to GBP 1.6 billion, in line with our estimates. On the positive side, U.K. electricity transmission's underlying operating profit increased 3.5% to GBP 1.1 billion, above our GBP 1 billion. Upside to our estimate was driven by higher revenue on higher incentives and inflation.

For 2019-20, the group guides for 95% achievement of allowed ROE in the U.S. and 200-300 basis points of outperformance for U.K. regulated businesses, both in line with our estimates. The group guides for investments around GBP 5 billion in 2020 and 2021, above our average estimates of GBP 4.5 billion, which we will adjust accordingly. We believe that the bulk of the increase is driven by the U.S., where National Grid achieved several rate cases during the year.

To fund increasing investments, the group extended its scrip dividend to 2021. The company guides for a GBP 1 billion increase in net debt in fiscal 2020, including GBP 2 billion cash proceeds from the Cadent disposal, and for gearing in the mid-60s.

Regarding the Ofgem proposals disclosed in December for the next RIIO-T2 price control to start in April 2021, the group highlighted that calculation errors were made by the regulator. The latter then proposed a cut in real baseline return for gas and electricity transmission networks from 7%-8% currently to 4%. National Grid argues that 5.5% would be a fair real return. We maintain our estimate of a cut to 5%.