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National Grid sweats its assets

The utility giant boosted capital investment to increase its longer-term returns
November 10, 2017

The timing of these results skewed National Grid’s (NG.) reported first-half figures. Its transmission businesses – which bills its supply customers in advance based on assumptions on usage and price – essentially under-recovered revenue during the period. However, this will level out over time. Strip this effect out, and adjusted operating profit was up 4 per cent year on year to £1.4bn.

IC TIP: Buy at 911.8p

Excluding timing issues, UK electricity transmission adjusted operating profit dipped £70m due to lower base allowances – the amount it can collect from its users. With much of the business’s major projects completed, capital investment also dropped 12 per cent to £515m. Management expects it to achieve its regulatory output targets, at a cost below its total expenditure allowance.

By contrast, capital investment by the UK gas transmission business increased by £41m to £157m. That was driven by National Grid's work replacing a pipeline under the Humber estuary. Increased spending means management expects to achieve its incentive targets rather than outperforming them, but reckons upgrading the assets will boost returns in future.

In the US regulated division, its rate filing programme – which updates the rates charged to clients according to inflationary and cost fluctuations – continued to pay off. It filed a rate case for its Niagara Mohawk Electric and Gas business, representing 30 per cent of its US rate base, which will boost revenue once agreed.

Analysts at RBC Capital expect adjusted pre-tax profits of £2.6bn during the 12 months to the end of March, giving EPS of 59.4p (from £3.6bn and 73p in 2017).

NATIONAL GRID (NG.)   
ORD PRICE:911.8pMARKET VALUE:£30.9bn
TOUCH:911.7-912p12-MONTH HIGH:1,097pLOW: 892p
DIVIDEND YIELD:4.9%PE RATIO:20
NET ASSET VALUE:497p*NET DEBT:

£23.1bn

Half-year to 30 SeptTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2016 (restated)6.2896522.115.17
20176.6884719.515.49
% change+6-12-12+2
Ex-div:23 Nov   
Payment:10 Jan   
*Includes intangible assets of £6.6bn, or 194p a share