National Grid Upgraded to 'Buy' by Citi: A Deep Dive into the Fundamentals

National Grid plc, a leading global utility focused on electricity and gas transmission and distribution, has received a significant boost from US bank Citi, which upgraded the company's rating to 'buy' from 'neutral'. This upgrade reflects Citi's positive assessment of National Grid's fundamentals, particularly its regulated asset value (RAV) and earnings growth profile. In this article, we will delve into the factors contributing to Citi's bullish outlook and explore the strategic and economic implications for investors.

Citi's upgrade is driven by several specific factors, including political and regulatory support, investments, and macroeconomic conditions. The bank highlights that political and regulatory support remains robust for National Grid as it heads into RIIO ET3, with the company's balance sheet also remaining strong. This support is evident in National Grid's regulated asset value (RAV) and earnings growth profile, which is largely underpinned by investments with political and regulatory support.

National Grid's investments in its networks have contributed to its strong fundamentals. As of March 2024, the company owns over 7,000 km of overhead power lines and over 300 substations for electricity transmission in the UK, and over 220,000 km of overhead lines and underground cables, and more than 185,000 substations for electricity distribution in the UK. These investments have not only enhanced the company's network infrastructure but also positioned it to capitalize on the growing demand for electricity and gas transmission and distribution services.



In addition to political and regulatory support and investments, Citi also mentions a combination of strong USD, re-rating of US regulated assets, and its house-view of second-half interest rate cuts as providing an attractive proposition for investors in National Grid. A strong USD can positively impact National Grid's operations and financials, especially given that a significant portion of its net sales comes from the United States (54.3%). A stronger USD can enhance the value of the company's US operations when converted back to GBP, thereby boosting its overall earnings and net sales. The re-rating of US regulated assets can lead to an increase in the value of National Grid's assets in the United States, resulting in higher regulated asset values (RAV) and earnings growth for the company. Lower interest rates can make borrowing cheaper for National Grid, reducing its financing costs and improving its overall profitability.

The combination of these factors creates an attractive investment proposition for National Grid by enhancing its earnings, improving its financial position, and boosting its overall value. This is reflected in Citi's upgraded rating of 'buy' and their revised price target of 1,063p.

In conclusion, National Grid's upgrade to 'buy' by Citi is a testament to the company's strong fundamentals, particularly its regulated asset value (RAV) and earnings growth profile. The upgrade is driven by political and regulatory support, investments, and macroeconomic conditions, which collectively create an attractive investment proposition for National Grid. As the company continues to invest in its networks and capitalize on the growing demand for electricity and gas transmission and distribution services, investors can expect National Grid to deliver strong performance in the coming years.