The national grid plc is an ‘Avoid’ for the time being as the stock looks fairly valued or slightly over valued for the time being. The stock finished trading on the London stock exchange at 849 p a share, up by 0.17% compared to the previous close. Currently. The stock has been trading above 20 day moving average (DMA), 50 DMA and 100 DMA of 847.0p, 814p and 822 p respectively. However, in technical terms or charting, we see a ‘double top’ pattern forming right now and the stocks seems topped out on the charts. As per the pattern, the stock should face critical hurdle at 862p and a failure to surpass that level might confirm the respective pattern and the stock may head towards a significant correction. However, the support levels are placed at 810p-820p zone. In our view the stock might correct up to 810p -820p and if the respective level is sustained then the investors or traders can start initiating fresh positions too.
Let’s throw some light on the latest financial results of the company. The company announced its latest half year results on 8th November 2018. As per the results, the underlying operating profit is down by 6% in 2018 vs 2017. However, the underlying EPS is up by 1.2% in the year 2018 compared to a year ago. The operating profit came down because of the impact of US tax reform, and £56 million higher costs from a number of storms. The majority of storm costs are recoverable under existing regulatory mechanisms.
The chief executive, Mr John Pettigrew commented, “We have continued to make strong operational progress in the first six months whilst maintaining excellent levels of safety and reliability. Investment in our networks increased to £2.1bn, including further progress on our three major interconnector projects. In the UK, we are implementing a cost efficiency and restructuring programme to ensure that we continue to drive outperformance for customers and shareholders. In the US, we have completed a full refresh of our rate plans so that all our distribution businesses are now operating under new rates, a major milestone which will support our continued growth. We continue to seek a fair settlement on union negotiations in Massachusetts. “Strategically, we have made good progress with the decision to exercise options for the sale of our remaining 39% share in Cadent and the final investment decision on the Viking interconnector. Looking forward, National Grid is well positioned for the ongoing energy transition and we are on track to achieve asset growth at the top end of our 5-7% range in the medium term”.
Based on the above discussion, the management guidance and our own estimates, we estimate National Grid’s 2019 revenue will be £15.479 billion (£15.250 billion for fiscal 2018) and the operating profit will be £3.405 billion (2018 operating profit was £3.493 billion). Our estimates are conservative and assume 1.5% year-over-year growth in sales and a margin for earnings before interest and taxes (EBIT) of 22.0%. In the past fiscal years also, operating profit margin on the topline has been in a range of 22%-26%.
From 2013 through 2018, national grid has traded at an average enterprise value by EBITDA multiple of 11.7x. That assumes a multiple of 12.3x to calculate the target price. Based on this ratio and on estimated 2019 EBITDA, the stock price target is 822 pence.