UBS downgrades National Grid on valuation, regulatory concerns

UBS downgraded its view on shares of National Grid, arguing that its US business was overvalued and that short-term regulatory risks in the UK had not been priced in.

With the stock trading at a 70% premium to its regulated asset value, potential interest rate hikes in the UK and US might also take some of the froth out of the record-high valuation, the Swiss broker added.

“We think the market is already paying for seven years' of growth – excessive, in our view,” analyst Rui Dias said in a research note sent to clients.

Dias therefore downgraded his recommendation on the stock to ‘sell’ from ‘neutral’ while trimming his target price from 880p to 870p.

The analyst admitted NG was an attractive growth story in the sector, with its business Stateside offering a clear growth opportunity.

On his estimates NG’s US-regulated activities would deliver approximately 60% of the company’s total growth in earnings before interest and taxes through 2020-21.

Nonetheless, its American business was trading at 12.5 times EV/EBITDA, 30% more than its local peers.

Furthermore, NG faced a risk from 2017 should competitive tendering in onshore electricity transmission be introduced in the UK.

“Although experience across the world suggests incumbent players can indeed lose significant market share, we believe such a risk is not priced in for NG.”