Broker snap: RIIO presents massive opportunity for National Grid

8th Jun 2012 12:51

Credit Suisse has raised its target price for utilities giant National Grid (NG) and reiterated its outperform rating, saying that Ofgem's new RIIO regulation presents a 2.5bn-pound opportunity for the group."NG has started to perform well again, as negative perceptions on the balance sheet and dividend concerns continue to recede. The outcome of the UK price controls could address these concerns and provide the mechanism and incentives for NG to enhance overall returns," the broker said in a research note on Friday morning. The RIIO regulation - the new performance-based model introduced by Ofgem to set price controls to ensure consumers pay fair prices - is designed to incentivise companies to reach higher returns. Credit Suisse says that if NG can achieve 200 basis points (bp) return on equity (RoE) outperformance in UK transmission and 300bp in gas distribution, there could be around £2.5bn of net present value; on the broker's current estimates for NG, it has only £1bn in its valuation.The broker has raised its target price from 700p to 730p, partly reflecting lower weighted average cost of capital as borrowing costs have fallen."A blue-sky upside case ? involving the extra c£1.5bn incentives and/or a sale of a stake in UK gas distribution ? would take our valuation to c775p."BC