Today I am looking at why I believe National Grid (LSE: NG) (NYSE: NGG.US) is a hot growth selection.
Capex flows set to crimp earnings
National Grid has been a patchy earnings performer during the past five years, as the vast sums required to keep the lights on has proved to be a heavy drag on the bottom line.
Indeed, the fragile state of Britain’s transmission grid was laid bare last month when the company revealed that spare electricity capacity will register at just 4.1% this winter, prompted by a series of generator closures and suspensions in recent years. This marks the lowest rate of coverage since 2007 and compares starkly with coverage of 16.8% just three years ago.
National Grid has vowed to pay companies to reduce their power usage to should the prospect of a blackout draw nearer, having already paid three plants to remain on standby if levels hit critical. But this is hardly a sustainable strategy, and with the business planning to expand its regulated asset base in both the UK and US at around 6% per year the heavy capex flows are set to keep on trucking.
As a consequence, the company is expected to punch a weighty 17% earnings decline in the 12 months concluding March 2015, to 55.1p per share.
… but expansion strategy lights up long-term picture
However, the business is expected to see earnings bounce back from fiscal 2016 as RIIO price controls help minimise expenditure, and a 5% bounceback is currently pencilled in to 57.8p.
Although National Grid’s near-term performance is being hampered by the need for huge investment, the company’s plans to turbocharge its asset portfolio on both sides of the Atlantic promises to push profits higher in coming years.
And the firm’s investment strategy could not come at a better time due to an environment of low interest rates, a phenomenon which is helping to drive borrowing costs through the floor — National Grid announced that net finance costs fell 15% during April-September to £492m.
With the Bank of England now expected to keep interest rates at record lows until the latter half of 2015 at the earliest, the transmission specialist should continue to build its asset base at low cost for some time to come.
On top of this, for those seeking to get in on the utilities sector, National Grid is undoubtedly one of the safest picks around in my opinion. While power peers such as SSE and Centrica, as well as water providers like Thames Water and United Utilities, have been repeatedly dragged over the coals over prospective tariff hikes, National Grid’s vertically integrated operations insulate it from the threat of revenues-busting caps.