UBS downgrades the rating of the UK National Grid as its valuation reaches a peak

LootboxPhobia · 2026-03-16T15:36:55+00:00

UBS has downgraded the UK’s National Grid to a sell rating due to its overvaluation, with the current share price trading at a 57% premium to RAB. The target price has been raised to 1,160 pence, reflecting increased capital expenditure and lower interest rates. UBS believes the stock’s cost of equity is too low and that there are risks of a market correction.

LootboxPhobia

2026-03-16 15:36:55

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Investing.com - UBS downgraded the UK National Grid (LON:NG) from previous ratings to Sell on Monday, citing that the utility company’s valuation is too high, currently trading at a premium of about 57% over the spot regulatory asset base (RAB), compared to a 53% premium as of March 2027.

The target price was raised from 1,100 pence to 1,160 pence, reflecting a 10% increase in UK transmission capital expenditure assumptions for 2032-41 and lower interest costs.

UBS estimates that the stock price implies an equity cost of about 7-8%, meaning the equity risk premium is below 4.4%, and the RAB is projected to grow at about 8% annually until 2041, compared to the company’s estimate of 5%.

This valuation suggests that three RIIO reviews of similar scale to the 2026-31 period will need to be completed.

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The company noted that during the four previous valuation peaks, the RAB premium for UK National Grid ranged from 42-61%, followed by a decline of about 37% in stock price within 5-19 months, with an average recovery period of about three years. UBS estimates that UK National Grid’s return in the US is approximately 10.1%, in UK transmission 11.2%, and in UK distribution 10.6%.

The spread between return on equity and the cost of equity is about 250 basis points, roughly half of the previous peak. UBS assumes RIIO T3 expenditure at 80% of the company’s assumptions, while the company assumes 85-90%, citing consumer affordability issues, planning reforms, and supply chain constraints as downside risks to delivery.

The implied P/E ratio for the US business is about 22.9, at the high end of the peer range. UBS states that its preferred regulated electricity network companies include Pennon with a target price of 650 pence and a Buy rating, Italgas with a target price of €12 and a Buy rating, and Redeia with a target price of €18.9 and a Buy rating.

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