A lot has happened in the four months since Tempus last recommended buying shares in National Grid, and much of it for the better (Emily Gosden writes).
In September the FTSE 100 utility was busy shouting about how Ofgem was going to drive away investors and risk causing blackouts with an “unacceptable” proposed price control settlement, curbing its spending and returns in its regulated UK networks business that make up nearly half of the company. The warnings always looked a bit overblown, but they appear to have succeeded in their aim: in December, the regulator relented and proposed a more generous deal.
The price control governs how much National Grid can charge consumers on their energy bills over the next five years to recoup its investments in gas transmission pipes around Britain and electricity transmission wires in England and Wales. Ofgem gave ground on two counts. It approved significantly more investment by National Grid, at £7.5 billion — less than the almost £10 billion the company had asked for, but a big rise on the less than £5 billion it had approved initially. It also increased the returns that National Grid could make from 3.95 per cent to 4.3 per cent. National Grid could yet appeal to the Competition and Markets Authority for an even better deal, but it looks respectable.
That’s not the only Ofgem development. This week, the regulator recommended that the government strip National Grid of its electricity system operator division, which runs the control rooms that balance power supply and demand and advises on the future development of energy systems. The writing has been on the wall for the ESO for some time amid concerns about conflicts of interest with the rest of National Grid, so the likely loss of the division should not worry investors. While prestigious, it typically accounts for less than 2 per cent of profits (last year’s share was unusually high because of one-off quirks). The impact of its loss will be “more wounded pride than anything economic”, as one City source put it. Besides, keeping the lights on is becoming trickier as Britain builds more intermittent renewables.
The growth in renewables brings new opportunities for National Grid’s networks business. In October the government committed to expand offshore wind capacity fourfold to 40 gigawatts by 2030. The present system, where each project builds its own cable to shore, is no longer fit for purpose, so ministers want to create an offshore power grid to connect new turbines efficiently.
As the owner of much of the onshore grid and a prolific developer of subsea power cables, National Grid will be a leading contender in tenders to build this. Bernstein Research estimates that from 2026 it could win up to £1 billion of work each year — about the same as it is investing each year on its onshore network. There also ought to be opportunities for increased spending in reinforcements onshore to cope with offshore wind and the switch to electric vehicles.
Things are looking up for National Grid’s US networks business, which makes up most of the other half of the company: President Biden’s green drive similarly should open up opportunities for growth.
All this is not fully reflected in the share price, at 882¼p yesterday, up from 850p when Tempus last recommended it. It has fallen back from 960p in November as vaccine-driven Covid recovery hopes increased risk appetite, weakening sentiment toward defensive stocks like National Grid. With the dividend yielding about 5.5 per cent and looking even safer than before, that should present a buying opportunity.
ADVICE Buy
WHY Positive developments in UK regulation and opportunities in offshore wind
Indivior
The settlement reached between Indivior and Reckitt Benckiser this week relating to American investigations into the sale and marketing of the company’s bestselling anti-opioid drug triggered a predictable but nonetheless welcome relief rally in its shares (Alex Ralph writes).
The stock rose by more than 13 per cent, or 16¾p, to 144¾p on the London Stock Exchange yesterday as the agreement with Reckitt, the FTSE 100 consumer goods group that spun off Indivior in 2014, raised the prospect of an end to years of litigation. Investors will hope, too, that it means there will be a greater focus on driving sales of Indivior’s recently launched treatments.
Reckitt agreed to withdraw a $1.4 billion claim, issued in November, against Indivior, which instead will pay a total of $50 million over five years. The companies have released each other from any claims arising from respective US settlements over the sale of Suboxone Film, the drug at the centre of the dispute and problems in the United States. Reckitt had reached a $1.4 billion settlement in July 2019 with the US authorities and last July Indivior agreed to pay $600 million and pleaded guilty to a criminal charge.
Indivior, a FTSE 250 company based in Virginia and with an office in Berkshire, is focused on the US, which is battling an addiction crisis. Declines in Indivior’s share price have been driven not only by the legal shadows but also by falls in market share of Suboxone Film after the launch of generic alternatives. However, the extent of the market share drop has not been as sharp as some had feared. Meanwhile, Indivior is seeking to boost sales of Sublocade, its next-generation injectable treatment.
Although its sales have been held back by restrictions from the pandemic, the company reinstated guidance for 2020 in the autumn and this month raised those expectations. Total net revenue is forecast to be between $645 million to $650 million, compared with guidance in October of $595 million to $620 million. Indivior’s other key new treatment is Perseris, for schizophrenia in adults. Analysts at Citi expect Perseris sales to more than double this year.
ADVICE Hold
WHY Settlement should allow focus on selling its new drugs
