Yielding growth
National Grid (LONDON:NG)’s FY15 results demonstrated once again the company’s operational excellence in the UK, and reiterated that the US planned rate filings are on track. With a solid operational outlook in the UK and improving US ROE through rate filings, we believe National Grid shares continue to offer investors an attractive combination of growth and yield.
Solid FY15 results
National Grid reported solid FY15 results with operating profit of £3,863m, clean PBT of £2,876m, EPS of 58.1p and DPS of 42.9p. Net debt was at £23.9bn. Group ROE has improved to 11.8% vs 11.4% in FY14. In the UK, incentive-based efficiencies have added an impressive 270bp to UK ROE and other additional allowances have contributed a further 90bp. Regulatory asset value is 2% higher at £25.4bn, as a result of £1.8bn capital investments. In the US, additional cost pressures from gas main leakages and repairs (made worse by two exceptionally cold winters), an increase in bad debt and an increase in capex, have led to a fall in ROE to 8.4% from 9.0% for FY14. The FY15 US rate base stands at $17.2bn (+7% y-o-y). Other divisions also performed well, with €1.4bn of planned investments approved for the Norway and Belgium interconnector projects. Overall, we believe National Grid delivered a solid set of FY15 numbers.
Outlook: UK more of the same, US rate filings
Looking ahead to FY16, National Grid looks to maintain the totex outperformance against regulatory targets in the UK, although other incentive performance in Gas Transmission will reduce, in line with previous guidance. In the US, major focus will be around preparation for rate filings, with the aim to improve US ROE. In terms of investment, National Grid expects group capex for FY16 to remain flat, and continues to see UK regulated capex in a range between £16-20bn for 2013-21. For the US, FY16 capex is expected to remain at similar levels as FY15. As a result, National Grid is on track to deliver average UK RAV growth (2013-21) of at least 5% pa and now expects US rate base growth to exceed 5% for the next several years. We continue to believe National Grid will be able to deliver on its capital growth and shareholder return commitments.
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