High voltage: National Grid’s profits spark to life amid Europe’s energy crunch
National Grid has seen pre-tax profits spark into life as the energy crisis deepens across the continent.
The multinational’s profits have jumped 86 per cent, with the group benefitting from its subsea cables that connect the UK to France and Belgium.
Rising energy prices are now charging the company’s profits amid a continent-wide energy crisis.
Wholesale energy costs are up over 250 per cent since January, due to shortages of supply from Russia, decreased storage, and rising consumption demands after the easing of pandemic restrictions.
The UK market is reliant on gas for 40 per cent of its energy needs, and has seen half of its energy suppliers leave the market since the start of the year.
In the past three months alone, 21 firms have left the market with Ofgem rescuing over two million stranded customers.
The group’s pre-tax profits have risen year-on-year from £583m to £1.08bn, while its interim dividends are in line with expectations at 17.21p per share, a slight upgrade on last year.
The strong half-year results were powered by the completion of multiple energy projects such as its £620m investment in a 1,400MW North Sea Link (NSL) to Norway and its acquisition of Western Power Distribution (WPD) through a £14.2bn deal in March.
National Grid is also set to offload a majority stake in National Grid Gas, and the sale of its Rhode Island business is on track for completion by the end of its financial year.
In recent years, it has began pivoting towards electricity growth and green energy infrastrucure, and has invested £2.8bn in infrastrucure in the past six months.
Future plans include a 33km tunnel under London to ensure the grid has enough capacity to deliver renewable electricity from sources such as offshore wind as demand soars over coming years.
Commenting on the company’s aspirations, John Pettigrew, chief executive at National Grid: “Our focus will be on delivering critical and green investment to enable the decarbonisation of power, transport and heat, and lead a clean, fair and affordable energy transition across the jurisdictions we serve.”
National Grid is now upgrading its full year outlook, and expects to deliver full-year underlying earnings per share at the top end of its 5-7 per cent range.
This upbeat forecast is driven by early comissioning of a new NSL interconnector between the UK and Norway, and higher auction prices across its interconnector portfolio, which is expected to deliver an extra £100m boost to its operating profit.
The group has a price to earnings ratio of 15.4, and a prospective dividend yield of 5.2 per cent for the next 12 months, according to data from Refinitiv.
While the company has not let a crisis go to waste as it revels in rising profits, National Grid also faces persistent debt issues.
Net debt has spiralled to £41.5bn in its half-year results following its proctive acquisitions in the market requiring it to borrow billions of pounds over the past six months.
Earnings per share are also down from 14.0p to 10.5p as a result of rebalancing for the new UK corporate tax rate of 25 per cent, which comes into effect from 1 April 2023.
The stock market has barely reacted to the announced results, with the company up 0.08 per cent on the FTSE 100.
Laura Hoy, equity analyst at Hargreaves Lansdown, believes the company has positioned itself at “the centre of the electric revolution” and was “impressed” with its progress.
However, she did believe there were “lingering risks” in its ambitious plans.
She said: “But there are still lingering risks. The WPD acquisition loaded the balance sheet up with debt, which, if not replayed quickly could become a crippling burden. The group financed the deal with short-term bridge loans with a view to sell off its Rhode Island business and the majority stake in NG Gas to plug the gap. The group says it’s on track to have them both off the books by summer 2022—but a lot can go wrong in six months time.”
Laith Khalaf, head of investment analysis at AJ Bell, argues “most the dials are pointing in the right direction” for National Grid even if its buying and selling spree makes its results “a bit messy to unpick”.
In his view, the company’s main challenge was off-loading cautious investors who perceived its a potential hedge.
He said: “The big macro question hanging over steady eddy utilities companies like National Grid is whether interest rate rises will flush out cautious investors who have ploughed into these stocks instead of bonds, so 2022 could see a technical headwind to price appreciation appearing.”