Calculated Investments And Infrastructure Growth Set To Bolster Earnings And Unlock Value

Key Takeaways

• National Grid plans massive network investments to drive asset growth, boost future revenues, and stabilize earnings.
  
• Strategic initiatives like asset sales and streamlined processes support margins while enhancing earnings and operational efficiency.
  
• Regulatory risks, tax policy changes, rising equipment costs, supply chain constraints, and legislative delays could impact National Grid's profitability, earnings growth, and project timelines.

Catalysts

National Grid plc transmits and distributes electricity and gas.

• National Grid plans to invest around £60 billion in its networks over the next 5 years, which is expected to drive significant asset growth and provide strong visibility on future revenues. This is likely to positively impact future revenue streams and earnings growth.
  
• The company has secured new rates for its Downstate New York gas business and Massachusetts Electric business, which provides better visibility on investment plans and supports earnings stability. This regulatory clarity is likely to improve net margins and earnings.
  
• The ongoing £4 billion Upstate Upgrade in the U.S. and accelerated investment in the National Grid Ventures segment reflect an increase in capacity and infrastructure reliability, which should enhance future revenues.
  
• National Grid's strategic initiatives to secure supply chain capacities and streamline project delivery processes aim to mitigate potential delays and cost overruns, thus supporting net margins and operational efficiency.
  
• The planned sale of non-core assets, such as National Grid Renewables and the Grain LNG facility, is expected to unlock shareholder value, potentially leading to buybacks or debt reduction, and enhance earnings per share (EPS).

National Grid Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming National Grid's revenue will grow by 8.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.9% today to 16.8% in 3 years time.
• Analysts expect earnings to reach £4.1 billion (and earnings per share of £0.82) by about November 2027, up from £1.7 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as £3.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.3x on those 2027 earnings, down from 27.7x today. This future PE is lower than the current PE for the GB Integrated Utilities industry at 20.3x.
• Analysts expect the number of shares outstanding to grow by 0.8% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.99%, as per the Simply Wall St company report.

National Grid Future Earnings Per Share Growth

Risks

• Regulatory risks associated with the RIIO-T3 process could impact National Grid's allowed returns. If returns are set at the lower end of the expected range, it could affect earnings growth. Additionally, changes in the associated incentive mechanisms could further impact profitability.
  
• Potential changes in U.S. tax policy could affect National Grid's financial performance. Although changes in tax rates are often passed through to customers, adjustments could create cash-flow and earnings volatility.
  
• Rising equipment costs, such as for transformers and HVDC systems, due to increased demand could affect National Grid's capital expenditure efficiency and lead to higher costs than anticipated, which might impact net margins if such costs cannot be fully recovered.
  
• There is a risk of supply chain constraints and delays, especially with securing critical materials and equipment for capital projects. This could delay project timelines, impact CapEx deployment, and subsequently affect revenue growth and earnings.
  
• Several projects depend on favorable planning and legislative reforms. Any delays in reforms, such as fast-track consenting in the U.K., could impact infrastructure project timelines, hindering the ability to meet investment targets, affecting future earnings growth.

Valuation

• The analysts have a consensus price target of £11.23 for National Grid based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £12.3, and the most bearish reporting a price target of just £9.7.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be £24.4 billion, earnings will come to £4.1 billion, and it would be trading on a PE ratio of 16.3x, assuming you use a discount rate of 6.0%.
  
• Given the current share price of £9.76, the analyst's price target of £11.23 is 13.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.