National Grid Earnings: Full-Year Contribution From WPD and Inflation Support Growth, as Expected

We don’t plan to materially change our GBX 1,040 fair value estimate after no-moat National Grid NG. released fiscal 2023 earnings in line with the consensus it polled and guided for a slight EPS slide in fiscal 2024 because of a regulatory change that has no cash flow impact. The firm will pay a fiscal 2023 dividend of GBX 55.44, 8.8% above fiscal 2022, in line with the policy to increase the dividend in line with inflation and implying a 4.9% yield, above the 4.2% sector average. Nonetheless, the shares appear a bit overvalued.

Fiscal 2023 EBIT grew 10% to GBP 4.58 billion, driving a 6.7% rise in underlying EPS to GBX 69.70, bang in line with guidance and consensus. The main positive driver was the full-year contribution from Western Power Distribution, which was acquired in June 2021. For the final year of the ED1 regulatory period, the business delivered a strong 13.2% return on equity, 360 basis points above the allowed level, notably due to the revenue indexation to high inflation. Returns will decrease in the ED2 regulatory period starting in fiscal 2024 since the real allowed return is 5.23%. U.S. regulated’s EBIT increased 6% to GBP 1.69 billion but decreased 4% at constant exchange rates as the sale of Narragansett Electric in May 2022 more than offset positive rate settlements and recouping of some coronavirus-related costs. On the negative side, U.K. transmission’s EBIT decreased 1% as the revenue indexation to inflation was offset by a negative one-off.

National Grid expects fiscal 2024 EPS to slightly decrease because of the U.K. government’s change in the capital allowance regime as of April 2023, under which lower cash taxes paid drive lower allowed revenue. Consequently, there is no cash flow impact. The group said that without this regulatory change, underlying EPS would have increased 6%-8%, in line with the annual growth targeted through fiscal 2026 that it reiterated.