UBS downgrades National Grid on peak valuation By Investing.com

UBS downgraded National Grid to Sell and raised its price target to 1,160p from 1,100p, citing a stretched valuation with shares trading ~57% above spot RAB and ~53% above March-2027 RAB. UBS models a cost of equity of ~7-8%, implies RAB growth of ~8% p.a. to 2041 (vs UBS’s 5% view), and flags that past RAB-premia peaks (42-61%) were followed by ~37% share-price declines over 5–19 months. UBS assumes 80% RIIO T3 delivery (vs company 85–90%) due to affordability, planning reform and supply-chain constraints, and prefers peers Pennon (PT 650p, Buy), Italgas (€12, Buy) and Redeia (€18.9, Buy).

Analysis

Market pricing for large regulated utilities currently assumes a steady, high-RAB growth and benign RIIO outcomes; that leaves NG vulnerable to a multi-quarter re-rating if any single RIIO decision or affordability signal disappoints. A rerating needn’t wait for a formal review—quarterly guidance, capex phasing updates, or supply-chain-driven delays (transformer, cable, labor) can compress the premium quickly, mechanically forcing selling into an illiquid tape given concentrated passive ownership in UK utilities.

Second-order winners are utility peers domiciled in jurisdictions with clearer tariff reset mechanisms or lower political risk — these can capture relative inflows as managers de-risk the space, and equipment/service vendors tied to T3 programmes could see lumpy orderbook revisions (positive or negative) that precede equity moves. Over a 6–24 month horizon, the dominant catalysts are: (1) RIIO T3 settlement signals, (2) UK government affordability hearings or guidance tightening, and (3) UK real yields moving materially higher which compress regulated multiples; any one can flip sentiment.

The path to mean reversion is asymmetric: downside from over-valuation tends to be faster (weeks–months) while recovery requires visible multi-year delivery of projects and consecutive favorable settlements (2–3 years). Active trades should therefore favor defined-risk instruments and pairs that capture relative valuation compression rather than outright directional exposure to macro-driven utilities beta.

Key Decisions for Investors

• Short National Grid (NG.L) via 9–12 month puts struck ~25% OTM sized to 1–2% portfolio risk; target 30–40% upside on option value if NG gaps down on any RIIO/capex delivery miss, stop if shares hold above the previous 6-month VWAP for 6 consecutive weeks.
• Pair trade: short NG.L vs long Pennon (PNN.L) or Italgas (IG.MI) — equal notional, 6–18 month horizon; this isolates RAB-premium contraction risk while capturing relative re-rating toward peers. Expect 2:1 skew in move magnitude (NG down > peer up); size to net 1–1.5% portfolio exposure.
• Buy 12–18 month call spreads on Italgas (IG.MI) or Redeia (REE.MC) to express preference for cleaner regulatory trajectories with capped premium; use vertical spreads to fund via selling short-dated NG calls to reduce cost.
• Hedge sector tail-risk with buying UK utility credit protection (if available) or shorting long-dated Gilts modestly: a UK political/regulatory shock that compresses equity multiples often widens utility credit spreads and lifts real yields—use these as offsets to equity shorts.