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National Grid results benefit from timing

The group beat EPS expectations
May 22, 2017

Utility giant National Grid (NG.) beat expectations with its latest full-year results, achieving an adjusted operating profit of £4.67bn, up 14 per cent. This, however, is not quite a fair representation as it includes the UK gas distribution business, most of which has been sold. Looking solely at continuing operations, operating profit was up 17 per cent for the year to £3.8bn.

IC TIP: Buy at 1052.5p

The sale of a 61 per cent stake in the gas business to a consortium of infrastructure investors was completed at the end of March. The income statement gained to the tune of £5.3bn from the disposal, and National Grid is now hoping to return £3.2bn to shareholders via a special dividend (see table) and £800m via share buybacks in the 2018 financial year, subject to shareholder approval.

The timing of the results has skewed the figures. For its transmission businesses, the group bills customers in advance based on assumptions from volume usage and price. This revenue may be over or under-recovered over a period, but in time it will level out. Stripping out the timing impact, the group's adjusted EPS of 73p falls to 66.1p.

The group's plan for future growth is formed of three planks. The first is to optimise efficiency. In the first half of its eight-year regulated price control framework, RIIO (revenue = incentives + innovation + outputs), National Grid has generated £460m of customer savings.

The second plank is focused on growing the asset base by 5-7 per cent each year, across both the UK and US. The group is planning £4bn in capital expenditure over the next year across the two countries, as well as on interconnectors to link to power grids in Norway and Belgium. The third plank of the plan is centred on keeping in line with technological developments in the sector. The group has formed National Grid Ventures to focus on developing new opportunities and increasing capabilities for the future. It has already committed to investing $100m (£76.9m) in residential solar assets to be developed in the US by solar company Sunrun.

Analysts at RBC Capital Markets are forecasting adjusted cash profit of £3.46bn (from 73p in FY2017) for the year to March 2018, giving EPS of 63.1p.

NATIONAL GRID (NG.)

ORD PRICE:1,053pMARKET VALUE:£39.5bn
TOUCH:1,052.5-1,053p12-MONTH HIGH:1,148pLOW: 889p
DIVIDEND YIELD:4.2%PE RATIO:22
NET ASSET VALUE:543p*NET DEBT:95%

Year to 31 MarTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201314.42.7157.840.85
201414.82.7565.742.03
201515.22.1853.242.87
2016 (restated)13.22.3350.443.34
201715.02.1848.144.27**
% change+14-6-5+2

Ex-div: 1 Jun

Payment: 16 Aug

*Includes intangible assets of £7.02bn, or 187p a share

**Excludes special dividend of 84.375p a share to be paid on 2 Jun (ex-div 22 May)