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Investing.com -- RBC Capital Markets downgraded National Grid (LON:NG) to "sector perform" from "outperform" on Wednesday, citing limited near-term upside and valuation that already reflects much of the company’s strong performance outlook.
The analysts said they continue to see National Grid as a solid long-term investment, particularly for its exposure to regulated electricity networks in the U.K. and U.S.
However, they noted the current share price, at 1,085.50p, leaves less room for further gains. RBC raised its price target slightly to 1,175p from 1,150p.
"Despite a strong investment proposition, we see more limited upside at the current share price," the analysts said. "Furthermore, we do not see an imminent catalyst for the stock."
One key concern flagged is the upcoming RIIO-T3 draft determination, scheduled for June 25.
RBC expects a challenging draft outcome consistent with previous regulatory cycles, pointing to historical cuts in allowable spending, 30% for RIIO-T2 and 17% for RIIO-ED2. A final determination is not expected until December.
National Grid’s business outlook remains robust, with guidance for a 6–8% earnings per share compound annual growth rate between fiscal years 2025 and 2029, underpinned by an approximately 10% asset growth rate over the same period. Still, RBC believes the market has already priced in these expectations.
In updating its forecasts following the company’s full-year results, RBC increased near-term earnings estimates.
For fiscal 2026, it now projects earnings per share of 77.7p, up around 5% from previous estimates.
Yet even with improved short-term expectations, the analysts flagged valuation limits, noting an about 35% premium to FY26E regulatory asset base for the U.K. operations and a valuation of about 17 times projected earnings for the U.S. segment.
The brokerage also pointed to potential regulatory risk and uncertainty around returns on equity.
RBC’s base case assumes a 5.79% post-tax cost of equity, which sits below National Grid’s proposed return of 6.3% CPIH real.
While National Grid’s share price has outperformed European regulated utility peers year to date, RBC stated that the rally may have left little room for further outperformance in the absence of new catalysts.
RBC’s downgrade is not a reflection of deteriorating fundamentals, the analysts said, but a reassessment of risk and reward at current trading levels.
"We continue to see NG as a strong compounder in the space and believe that the business will deliver on its current £60bn capex plan FY25–29," the note said. "However, we struggle for upside at the current share price."