Credit Suisse upgrades National Grid for first time in three years

Analysts at Credit Suisse have upgraded their recommendation on shares of National Grid for the first time in three years now that valuation metrics have fallen back to their mid-2014 levels, with the shares now pricing-in what they saw as "fair" assumptions for future growth and returns.

Specifically, the shares were again changing hands at a 36% premium to the company's combined regulatory asset base and rate base, they said.

Hence the decision by Mark Freshney, Guy Mackenzie and Vincent Giles to raise their recommendation on the shares from 'underperform' to 'neutral'.

However, the target price on the shares was left at 860.0p despite the analysts rolling forward their valuation to March 2019, due to the company's high pay-out ratio.

They also emphasised the business's increasing exposure to the US and away from the UK, reducing its political risk.

On that note, with Labour leading by about two percentage points in the polls, Credit Suisse explained that a nationalisation of the group at a valuation of 1.0 times its regulatory asset base might see the stock drop to about 650p a share.

Regarding the US, the investment bank believed National Grid would exit the 39% of UK gas distribution it had left in 2018.

Should the firm return the resulting cash to shareholders then in March 2021 - when the current price controls ended - just 53% of National Grid's enterprise value would be left in Britain.

Markets had also priced-in a low 5% anual rate of growth in its asset base, versus the between 6% and 7% management aspired to; however, that meant National Grid would continue relying on its scrip dividend to maintain its retained cash flow to net debt ratio above 9% and the UK operating company's credit ratings at A-/A3.

In terms of the group's return on equity, Credit Suisse estimated it would stabilise at about 10%.