National Grid gets promoted to overweight by HSBC

UK utilities giant National Grid had its rating promoted to ‘overweight’ on Thursday by HSBC who have cited the company’s defensive characteristics as attractive.

The bank raise the company’s rating to ‘overweight’ from ‘neutral’ and thinks the stock’s recent underperformance offers a buying opportunity. It cites National Grid stock underperforming the FTSE All Share by 9.8% over 3 months.

“In an uncertain commodity environment with an upcoming UK election we believe National Grid’s defensive investment proposition with a secure yield and scope for regulatory asset growth remains attractive,” said HSBC.

The bank notes that National Grid trades at a price-to-earnings discount and a 100 basis points yield premium to the UK water sector.

“National Grid is continuing to deliver operational and financial outperformance in its regulated business, filing to drive up US returns and developing non-regulated opportunities such as new interconnectors,” HSBC added.

The bank highlighted that National Grid’s Treasury team is able to finance its investment much more competitively than the price indicated by the indices used by British regulator Ofgem.

“For the US, we believe that the current rate cases will increase the return on equity in the states on which National Grid operates in gas and electricity distribution over the next two to three years,” said HSBC.

Due to a change in methodology, HSBC cut their target price on the stock to 995p from 1010p.