National Grid ‘reinforcing its key role’ in the UK’s energy transition, says broker

0
9

National Grid PLC’s (LON:NG.) agreed acquisition to strengthen its focus on the UK electricity networks makes it a key investment in the UK energy transition story, said Berenberg as it upgraded the shares to a ‘buy’ recommendation.


The FTSE 100 group has agreed to pay GBP7.8bn for UK-focused Western Power Distribution (WPD), which the broker said will enhance group earnings by over 15% and “strengthen its position as a key facilitator of the energy transition”, contributing to the creation of a platform for the UK’s 2050 net zero emissions targets.


Repositioning the business with the WPD deal increases National Grid’s focus on electricity networks to around 70% of regulated asset value (RAV) and the UK to around 60% of group underlying earnings (EBIT).


The company’s investments are “essential to enable changes in the energy mix as well as in the wider economy”, the Berenberg analysts said in a note to clients on Thursday, as they will help enable electric and hydrogen fuelled transport, industrial processes and domestic heating.


“In our view, it reinforces National Grid’s already crucial role in the long-term success of the UK energy transition (while not forsaking the important role the group has to play in the US’s own transition). National Grid’s important multi-year (or multi-decade) investments will be key to allowing other important aspects of the energy transition to take place.”


Debt is expected to rise to GBP37.9bn by March 2024, with leverage “high but manageable”.


The analysts also flagged that tougher regulation is likely to be around the corner, with Ofgem’s flexing its muscles following a recent regulatory review, with a repeat thought to be likely in the 2023 distribution review.


“However, in our view, the consequences are outweighed by the value accretion from the WPD acquisition and the steady long-term growth potential of the group,” the Berenberg team said.


They upgraded their rating from a previous ‘hold’ stance and raised their share price target to 1,100p from 930p, similar to the thumbs-up for the WPD deal from Credit Suisse recently.

LEAVE A REPLY

Please enter your comment!
Please enter your name here