After a strong run, UBS thinks National Grid PLC (LSE:NG.) has run out of steam.
The broker has cut its rating on the utility group to 'neutral' from 'buy', arguing that the share price now fully reflects the good news, including generous regulatory terms and solid returns in its US business.
National Grid, which owns and operates electricity and gas networks in the UK and the US, has been riding high on expectations of generous future returns from its next round of UK price controls.
The RIIO-T3 framework, due to cover the period from 2026 to 2031, is likely to offer a real return of about 4.4%, the highest since 2020. That might sound low, but for regulated assets, which have steady and inflation-linked revenues, it is relatively attractive.
Even so, UBS believes the shares already reflect this optimism. The bank points to a 38% premium to the company’s regulated asset base, which is a rough estimate of what its networks would be worth if sold.
That is roughly in the middle of NG's historical valuation range, but UBS says investors should not expect that premium to expand much further given slowing growth and weaker returns from here.
There is also the issue of leverage. Although the transmission giant has tidied up its balance sheet with a recent rights issue and some asset sales, its plans to spend £60 billion over five years still involve a lot of borrowing.
UBS expects earnings per share to grow at around 5.5% a year, but this is down from previous decades, when higher returns and less capital spending helped boost profits more quickly.
While the US business still looks attractive, with rising returns allowed by regulators and strong investment needs, UBS sees more upside elsewhere. It prefers SSE, which has a lower valuation and more visible growth catalysts.
National Grid still offers a dividend yield of just over 4%, which may appeal to income-seeking investors. But for those hunting for capital growth, UBS thinks the easy money has been made.
The shares were down 1% at 1,062p.