Morning Note: Market news and an update from National Grid.

Market News

US equity markets drifted lower last night – S&P 500 (-0.3%), Nasdaq (-0.2%). Nvidia rose 6% post-market after a bullish sales forecast pointed to the enduring strength of the AI boom. The chipmaker announced a 10-for-1 stock split and boosted its quarterly dividend by 150%. This morning in Asia, markets were mixed: Nikkei 225 (+1.3%); Hang Seng (-1.8%); Shanghai Composite (-1.3%). A gauge of Asian chip manufacturers hit the highest since February 2021.

The FTSE 100 is currently trading 0.2% lower at 8,358. Sterling buys $1.2730 and €1.1750. The oil price slipped to $81.50 a barrel.

Hargreaves Lansdown is up 10% this morning after it rejected a £4.67bn takeover proposal from a consortium led by CVC Advisers and the Abu Dhabi Investment Authority, saying it “substantially” undervalued its prospects.

Miner BHP Group fell 3%, after smaller rival Anglo American rejected its third takeover proposal and agreed to a one-week extension for the deadline to make a binding offer.

Benchmark Treasuries were lower after the release of the latest Federal Reserve minutes – the 10-year currently yields 4.43% – and gold fell back to $2,360 an ounce. Officials want rates to remain higher for longer, with “many” questioning whether policy is restrictive enough. Some mentioned a willingness to tighten further if needed. Goldman Sachs updated its longer-term US fiscal outlook, projecting debt-to-GDP will hit 130% in 2034 — up from 98% at present.

Source: Bloomberg

Company News

National Grid has today released results for the financial year to 31 March 2024. The company has also set out its investment plans for the next five years which will be partly funded by a £7bn Rights Issue. In response, the shares have been marked down by 8% in early trading.

National Grid operates a regulated business in the UK and US, with electricity and gas transmission and distribution assets. The group has no direct exposure to volatile commodity prices and relatively little exposure to usage levels.

Over the last couple of years, the group has undertaken several transactions to pivot its portfolio towards electricity. This has enhanced the group’s role in the decarbonisation of the energy system, with investment in infrastructure that enables higher penetration of renewable energy and low carbon technology. This morning, the company gone further and announced a refreshed strategy to be a pre-eminent pure-play networks business.

This will involve a significant step up in investment, around £60bn over the five years to March 2029, nearly double the prior five years. This will deliver a significant step-change in critical energy infrastructure in the UK and US in support of the energy transition and economic growth objectives. This is expected to drive 10% group asset growth CAGR (vs. 8%-10% previously), with group assets heading towards £100bn by 2029, and underlying EPS CAGR of 6%-8%. Credit metrics will be consistent with current group rating.

Of the £60bn investment, around £51bn will be aligned to the EU Taxonomy to decarbonise energy networks. Nearly 80% will go into the group’s electricity networks, moving the mix towards 80%/20% electricity/gas by 2029. The company will further streamline its portfolio to focus on pure-play networks across regulated and competitive, onshore and offshore networks, with the intention to sell Grain LNG and National Grid Renewables. The company also has an option to sell the final 20% equity interest in National Gas Transmission.

To help fund the increased investment, the company has today announced a capital raise of £6.8bn (net) by way of a fully underwritten 7 for 24 Rights Issue at 645p per new share. This represents a 34.7% discount to the theoretical ex-rights price based on yesterday’s closing price of 1,127.5p, adjusted for the recommended final dividend for FY2024 of 39.12p. It is expected that the dealings in the new shares will commence on 12 June.

The fundraising should give the group appropriate financial flexibility to deliver its strategy over the 5-year financial framework, and funding clarity until at least the end of the RIIO-T3 regulatory period. In the near term, to support efficient management of funding costs, c. £750m of the net proceeds will be used to refinance a portion of the group’s outstanding hybrid bonds that have first call dates in the next 15 months.

On to the results. During the latest financial year, underlying operating profit grew by 6% on a constant currency basis to £4.8bn. This was driven by growth in revenues in UK Electricity Transmission through the RIIO-T2 regulatory price control, non-recurrence of Western Link liquidated damages, and higher rates in New York and New England. This was partly offset by lower regulatory RIIO-ED2 incentives for UK Electricity Distribution, lower interconnector revenues, and lower property sales principally related to the St William transaction.

The company has exceeded its cost efficiency programme with savings of £513m, versus a target of at least £400m p.a. It has also delivered a flat controllable cost base even whilst the group’s regulated assets continue to grow. This has enabled the group to mitigate some inflationary pressures on both the business and its customers. Underlying EPS grew by 6% to 78p.

Capital investment rose by 11% at actual exchange rates to £8.2bn during the year, principally driven by early investment relating to Accelerated Strategic Transmission Investment (ASTI) in the group’s UK Electricity Transmission business, increased spend on new transmission projects in New York, and higher asset condition and grid modernisation spend in New England. As a result, asset growth was 9.7%, helped in part by regulatory indexation, and at the upper end of its 8%-10% range.

National Grid has a robust balance sheet and a strong investment grade credit rating, underpinned by regulatory revenue, which allows the group to secure the required long-term funding needed to invest in its business. During the year, net debt rose by 6% to £43.6bn, with regulatory gearing of 69%.

The stock remains popular for investors seeking an attractive income that is growing in real terms – the dividend policy is to deliver annual growth in line with the increase in average UK CPIH inflation. This morning, the group declared a dividend of 58.52p, up 5.55%, equating to a yield of 5.2% at the current share price. Looking forward, the group will maintain a progressive level of total dividend growing from the FY2024 current level. However, in per share terms, the 58.52p for FY2024 will be rebased given the increased number of shares following the Rights Issue. The group will then aim to grow the DPS in line with UK CPIH inflation in keeping with the current dividend policy.

Source: Bloomberg