The National Grid (LSE:NG.) share price fell around 3% on Wednesday (12 June) after the energy infrastructure giant said it had received a 91% take up for its £7bn rights issue.
The FTSE 100 firm says the raise is part of a wider effort to invest £60bn over the next five years. That’s double the company’s investments over the past five years.
So where will the stock finish the year? Spoiler alert, it’s not easy to call.
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New shares
National Grid is conducting a rights issue, offering existing shareholders seven new shares for every 24 shares they own, at 645p per new share — a considerable discount to the current share price.
This move will see the issuing of 1.1bn new shares, which will increase the total number of shares by 29.2%. Shareholders can buy new shares at a discount, diluting the share value but raising needed capital for the company.
With 91% of new shares to be taken up by existing shareholders, underwriters Barclays and JPMorgan will have to find buyers for the shares or take them up themselves.
The theoretical ex-works price of the stock sits around 970p. This is calculated by adding the current market-cap and the amount of funds being raised, then dividing it by the total number of shares after the rights issue.
Investor concerns
However, the practical element of the rights issue isn’t the only thing impacting the share price. First, many analysts consider the rights issue a bold move considering the lack of appetite for UK stocks.
Moreover, there’s a question of timing. With an election and Ofgem’s initial view on returns on its RIIO-T3 price control period coming up, it didn’t seem like the best time to raise funds.
Equally, it’s a heavily indebted firm announcing a major investment programme. That’s going to scare some investors away.
However, Bank of America said that the market appears to be under-appreciating the opportunity, pointing to “the substantial de-risking of the balance sheet and for enhanced earnings visibility“.
The average share price target for the stock is currently 1,122p. But it’s falling quickly as analysts lower their price target following the rights issue.
The bottom line
Personally, I’m keeping my powder dry on National Grid shares. Stocks undergoing transitions — in this case, a £60bn investment programme — tend to trade at discounts. Just look at BT.
National Grid shares are currently trading around 12.3 forward times earnings. Moving to 2025, that figure falls to 11.6 times, and then 10.6 times in 2026. Its current dividend yield is 6.6%, but that will fall following the rights issue.
None of these figures are off-putting, and it’s great to see a company with an improving earnings outlook.
So where will National Grid shares be at the end of 2024? Well, that was a tough question to ask myself. Given the variables, it’s hard to say. My hunch would be a significant discount to the average share price target.
