National Grid - Ofgem's Sector Specific Consultation

[jackdaww]

I sympathise with Walrus on this one. Being stoic like Itsallaguess and others is fine and it certainly will not hurt me that much but all the same a 10% drop in one day from a stalwart is not good news. It indicates that the UK market is fragile at the moment and any excuse will knock it back. We are getting used to this though and further volatility can be expected in the coming months as Brexit (or not) works its way to some sort of conclusion, or at least direction.

Dod

====================

stoic --- a mere flesh wound then......??

[Arborbridge]

I'm not surprised at anything at present: I think we are on "bear watch" and further falls are probably rather than possible. Just because my target of 6900 was passed, doesn't mean there can't be more, and there's no sign of a reversal.

I heard this morning that some financial institutions are increasing their cash rather than investing it because they are not sure which direction the market is going in. I suspect there are a few PIs and HYPers like that, too.


Arb.

PS a new target of around 6400 was set in October.

Moderator Message:
Please try to limit discussion to HYP principles (which don't include targets). Thanks - Chris

[monabri]

Let's see what tomorrow brings.

Recovering somewhat ..approx halved the recent drop (from 835p to 758p to close today at 796p).


can I give myself a "rec" ?

[Arborbridge]

I'm not surprised at anything at present: I think we are on "bear watch" and further falls are probably rather than possible. Just because my target of 6900 was passed, doesn't mean there can't be more, and there's no sign of a reversal.

I heard this morning that some financial institutions are increasing their cash rather than investing it because they are not sure which direction the market is going in. I suspect there are a few PIs and HYPers like that, too.


Arb.

PS a new target of around 6400 was set in October.

Moderator Message:
Please try to limit discussion to HYP principles (which don't include targets). Thanks - Chris

Fair enough, I used the more specific word "targets" but logically you should also rule out other speculation people talk about, which is also "non HYP". And example (one from several authors) might be:-
" It indicates that the UK market is fragile at the moment and any excuse will knock it back. We are getting used to this though and further volatility can be expected in the coming months as Brexit (or not) works its way to some sort of conclusion, or at least direction."

Some tangential discussion and swapping of opinions and views is at the heart of a healthy investment board. I make no apology for having mentioned several times that I have been employing caution (as have other HYPers) in recent months based on my feeling that the market is more likely to go down (to 6900 or more) further rather than up. That this is based on a particular chart idea should not be criticised more than someone just waving his hands in the air and feeling the temperature!

Arb.

[TheMotorcycleBoy]

I'm wondering what to buy with our April-May investment contribution. Basically all the high margin, high ROCE firms which we hold are currently fairly pricey.

We have a smallish amount of NG. in our portfolio, which is there as an income play. I'm umming and ahhing as whether to top up or not based the regulator's decision etc. So I've spent some time on the NG. investor's part of their site.

A lot is wishy washy, but the view I'm currently forming is that whatever decision is to be taken won't be disclosed until EOY 2020:

https://investors.nationalgrid.com/riio-2

If I'm reading the above content correctly.

So I dug a bit further and came across this response from 15 March from NG.

Specifically, we show that rectifying the individual errors in the current proposal, taking a balanced view of the full suite of evidence and removing the unjustified 50 basis points outperformance adjustment results in an allowed return on equity of 5.5%(real RPI basis).

What's this saying? Is it stating that the regulators will attempt to force price controls to cap ROE to 5.5%?

Perhaps this is a concern. Surely this then assumes Net Income hence EPS hence DPS fall accordingly. I glanced at the relevant sections of the Financial statements for reporting periods ending March 2017 and March 2018 and ignoring the discontinued operations and exceptional earnings, I calculated:

Code: Select all

           |  2017 |  2018
Net Income |  1810 |  2060
Equity     | 13565 | 20384
ROE        | 0.133 | 0.101         


(NG. have their own versions of their RoE on page 16 of their AR17-18 my figures are roughly inline with theirs.)

So indeed Net income would need to fall to about half those levels in order for permitted RoE of 5.5% to be met. That, of course, is assuming that I've not got my wires crossed here, I've certainly made assumptions re. my interpretation of the linked PDF.

Also how do Grid's assets and earnings in the US effect all this? Presumably Ofgem's price caps only effect the UK part of the enterprise correct?

Glancing at page 111 on the above linked AR, I note there to be at least twice the revenue is generated in the US:

For the year ended 31 March 2018, revenue in the UK Electricity Transmission segment decreased by £285 million to £4,154 million and adjusted operating profit decreased by £331 million to £1,041 million.
Revenue in our US Regulated business increased by £341 million to £9,272 million and adjusted operating profit decreased by £15 million to £1,698 million.

So would I be correct in assuming that Ofgem are looking about a reduction of 50% of UK profits, and so for the enterprise as a whole (with at least 66% Stateside) only a 16% drop in EPS overall? Or am I talking rubbish?

Any opinions welcome,
Matt