In a short trading update ahead of more detailed half-year results, National Grid confirmed its first-half performance has been in line with management expectations. As is typical, underlying earnings per share (EPS) is expected to be weighted to the second half.
In the UK, operating profit is expected to be split fairly evenly across the year. Compared to previous guidance, an additional contribution of around £70mn is expected from the Electricity System Operator.
In the US, operating profits are expected to be weighted to the second half.
The shares were broadly flat following the announcement.
Our view
A short trading update revealed that National Grid’s ticking along as expected in the first half, and as usual, profits look to be weighted to the second towards the second half.
Investor sentiment has strengthened since the group announced a mammoth investment plan alongside a £6.8bn equity raise back in May. This raise was bigger and sooner than markets were expecting, which combined with rebasing the 2024 dividend at a lower level, unsettled markets at the time.
But that news seems to have been digested well now. The energy landscape’s changing fast, and the group’s attempting to plant itself at the centre of the electric revolution. Investment in energy infrastructure is set to rise significantly to around £60bn over the five years ending March 2029, nearly double the investment over the past five years.
Alongside this, the portfolio is being streamlined, with a couple of assets that don’t fit the new strategy set to be sold off. This will free up extra cash to plough back into other areas of the business while also allowing management to focus on building out its energy infrastructure.
The dividend is also being rebased lower to help fund these growth plans and shore up the balance sheet. We have no concerns about balance sheet health, but this all 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. The ongoing cost-of-living pressures and the recent surge in energy costs mean consumers are already struggling to pay their bills. That's put a lot of pressure on regulators to start slicing into utilities' profits which could potentially put brakes on future growth.
Given the group's significant investment in this current high-rate environment, we've been keeping a close eye on the cost of funding it all. Finance costs were broadly flat year-on-year, and current high levels of inflation are actually a net benefit for National Grid, and should more than offset the negative impact of higher interest rates.
We commend National Grid’s willingness to pounce on shifting energy trends. The sheer scale of the investment plans brings with it increased execution risk, but should management pull it off, investors will likely be rewarded for their patience. As always though, nothing is guaranteed and there’s likely to be some volatility along the way as the group executes its strategy.
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.
National Grid key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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