National Grid PLC (LON:NG.) has been downgraded to ‘neutral’ from ‘buy’ by analysts at UBS, who said that at current levels the shares risk/reward profile is now “more balanced” following an “overreaction” by investors in May to draft price controls introduced by energy regulator Ofgem.
In a note on Tuesday, the Swiss bank said further upside for the utility group “could come from Ofgem’s final determination or from a stimulus plan in the US”, however this could be at risk due to “disappointment from Ofgem leading to a [Competition & Markets Authority] process next year; delays getting a stimulus plan agreed in the US; or any further [coronavirus] impacts over the winter”.
“Expectations were lifted in September by the UK [CMA] report on the water sector, which could mean Ofgem has to raise its headline allowed [return on equity] from <4% (real, post-tax) by about 100 [basis points], to circa 5%. However there are still some risks”, UBS said, highlighting that even if the headline rates are increased and more of the company’s spending plans are approved, a “cost challenge may remain in place and could mean more restructuring charges”.
The bank also said that National Grid’s US businesses are “well positioned to contribute to a US stimulus plan with a focus on clean energy infrastructure”, however the results of the US election earlier this month “indicate the Democratic party does not appear to have the Senate majority needed to pass such plans quickly”.
Despite the downgrade, UBS also upped its target price for National Grid to 975p from 920p to reflect the “improved chances of a positive final determination of Ofgem in December”.
National Grid shares were 0.3% lower at 942.4p in late-morning trading.