Edison Issues ADR Outlook on National Grid (NGG)

National Grid's high visibility revenues, underwritten by regulatory returns across the UK and US, offer equity holders an attractive combination of asset growth and a 4.3% dividend yield. Both the UK and US businesses are well run. The UK business has predictability of revenues until the end of the current regulatory period in 2021 and is delivering returns ahead of OFGEM's expected 'base returns'. In the US, a rate filing programme is underway, which will result in enhanced returns in the years ahead. Now that the sale of the UK Gas Distribution is complete, management can continue to focus on delivering shareholder returns across its business units. Management targets 5-7% asset growth, and our fair value per ADR of $69.40 offers 9.1% upside versus current prices.

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We use a blended average of a sum-of-the-parts valuation and a peer-based multiple model. Our SOTP is driven by a segment-based premium to regulatory asset value (RAV)/asset base model, which implies a fair value per ADR of $63.90, while our multiple-derived model offers a fair value per ADR of $74.90. The average of $69.40 offers equity holders 9.1% upside to current levels. We highlight rising government bond yields as a key risk for investors owing to NG's bond proxy status.

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