National Grid’s half-year revenue fell by 6% to £8.0bn, with the biggest fall being seen at the UK Electricity System Operator, which has since been disposed of to the UK Government for around £0.6bn.
Underlying operating profit increased by 15% to £2.0bn, ignoring currency impacts. National Grid Ventures was the only division where profit fell. This was offset by gains elsewhere with increased rates in New York and higher revenues in UK Electricity Transmission being amongst the largest drivers.
Free cash outflows increased from £0.3bn to £1.4bn reflecting a deterioration in cash generated from operations and increased capital investment.
Net debt fell by £5.1bn over the first six months to £38.5bn, benefitting from a £6.8bn equity fundraise.
National Grid expects operating profit growth of around 10% for the full year. In terms of earnings per share (EPS) growth, the additional share count from the Rights Issue is now anticipated to largely offset this improvement. Over the following four years, EPS is expected to grow at an average annual rate of 6-8%.
The interim dividend has been reduced from 19.40p to 15.84p.
The shares were broadly flat in early trading.
Our view
National Grid’s first-half results showed that it’s ticking along well, with operating profits set to grow at double-digit rates across the full year.
Investor sentiment has strengthened since the group announced a mammoth investment plan alongside a £6.8bn equity raise back in May. With the energy landscape changing fast, these measures were all part of a bigger plan 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 prior 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. The UK Electricity System Operator business was the latest to get the chop, being sold to the government for around £0.6bn in October. This has freed up cash to plough back into other areas of the business while also allowing management to focus on building out its energy infrastructure.
The dividend was also rebased lower to help fund these growth plans and prevent pressure on 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. Tight consumer budgets and a recent rise in energy costs mean many consumers are struggling to pay their bills. That's put 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 high-rate environment, we've been keeping a close eye on the cost of funding it all. Finance costs are actually expected to be around £100mn lower this year as a result of lower levels of inflation and net debt.
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.
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.This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.Non - independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place(including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.Please see our full non - independent research disclosure for more information.