National Grid: Raising Economic Moat Rating to Narrow and Fair Value Estimate

Key Morningstar Metrics for National Grid

• Fair Value Estimate
  : GBX 1,440
• Morningstar Rating
  : ★★★★
• Morningstar Economic Moat Rating
  : Narrow
• Morningstar Uncertainty Rating
  : Low

On March 2, National Grid NG. accepted the final determination for the RIIO-T3 2026-31 regulatory period and rolled over its business plan to 2031, maintaining its annual asset growth guidance at about 10% but raising its EPS guidance to 8%-10% from 6%-8%.

Why it matters: A key driver of the increase in the EPS guidance is the group’s confidence in achieving a return on equity of 9% on the UK transmission grid, above the allowed nominal return of 7.7% by delivering a good chunk of efficiencies incentivized by the regulator.

• We concur with the group’s confidence given its strong track record in the business and the improvement of the efficiency sharing mechanism under RIIO-T3. Accordingly, we increase our fiscal long-term EPS estimates by nearly 8%, implying a 2025-30 EPS CAGR of 9.4% versus 7.8% previously.
• The RIIO-T3 improvement and the likelihood that the group will outearn baseline returns make us confident that the firm will deliver sustainable economic profits underpinning an upgrade of our economic moat rating to narrow.

The bottom line: Our higher estimates and economic moat rating upgrade drive a 19% increase in our fair value estimate to GBX 1,440, implying a 3.4% dividend yield, a fiscal 2027 P/E of 16, and an enterprise value/regulated asset value of 1.5.

• Shares appear undervalued as rising Gilt yield because of fears of an inflation surge driven by the Iran war overshadowed the earnings guidance raise.
• With indexation of returns and regulated asset value to inflation, the UK regulatory regime is the most favorable in Europe.