Goldman Sachs lifts National Grid target price, but stays at 'sell'

Analysts at Goldman Sachs boosted their target price for shares of National Grid after rejigging their valuation methods for the company, but said the premium they were trading at was not justified, leading them to reiterate their 'sell' recommendation.

The investment bank said the company's allowed regulated returns would diminish as the average 10-year trailing iBoxx index to which they were indexed increasingly reflected the then current interest rate environment.

That would offset the benefits for the company from investing in its asset base, which together with rising interest costs and declining profits from its other businesses would result in muted earnings per share growth over coming years.

Nonetheless, the 12-month target price was increased from 855p to 946p, albeit partially reflecting higher trading multiples for its regulated rivals, analysts Ajay Patel and Alberto Gandolfi said.

Changes to the components of their valuation were also a factor, they said.

The new target price was derived from a mix of measures, including: a price-to-earnings multiple valuation of 858p per share (40%), sum-of-the parts valuation of 954p per share (40%) and its dividend discount model which yielded a value of 1,106p (20%).

The P/E multiple of 14.5 applied to the company's profits was obtained from an average of its sector peers'.

Goldman noted that its fiscal year 2018 EPS estimates for the firm were 7% below the Bloomberg analyst consensus at the time.