Broker snap: JPMorgan upgrades National Grid as divi risk alleviates



LONDON (ShareCast) - JPMorgan Cazenove has upgraded its recommendation for energy company National Grid (LSE: NG.L - news) from 'underweight' to 'neutral', saying it is now the lowest risk stock in the UK utilities sector.

The broker said that National Grid's £2.0bn hybrid securities issuance "alleviates some of the tightness in credit metrics" and is a clear indication of the company's commitment to maintaining its dividend.

"Grid's hybrid securities issuance was significantly oversubscribed and as such the pricing and duration are attractive, in our view. Importantly the hybrid reduces the constraints on Grid's credit metrics later in the regulatory period, as the rating agencies provide 50% equity credit for the hybrid."

National Grid said last month, as it agreed to all of the UK RIIO price-control arrangements proposed by Ofgem, that it is in the latter stages of evaluating its long-term outlook and will shortly announce a new dividend policy for the financial year starting April 1st. However, JPMorgan thinks that a rebasing of the dividend is unlikely.

The broker's full-year earnings per share (EPS) forecast for this year (ending March 31st) has been cut by 2.9% to 52.9p to reflect higher costs associated with storms in the north-east of America. Next year's EPS estimate however has been raised by 2.4% to 53.9p due to a weaker sterling, partially offset by the higher interest costs associated with the hybrid issuance.

The target price for the shares has been lifted from 640p to 720p.

The broker concluded: "We think that the investment case for Grid remains mixed. In our view, the valuation is full (26% premium to March 14 [regulatory asset value]) with limited earnings growth. However, with the regulatory review now complete and eight years of visibility for over 60% of the business, we view Grid as the lowest risk stock in the UK utilities sector."

Shares were up 0.8% at 739.89p in mid-morning trade on Monday.