This document recommends a short position on National Grid and a long position on SSE based on their recent performance and outlook. National Grid has underperformed since tougher-than-expected regulatory proposals and may face further risks, while SSE is well-managed but could face challenges from rising costs and weaker competitors. The document provides market data and analyses for both companies to support taking an opposing position on each.

1. Pair Trade: National Grid - Short SSE
Wednesday, October 15th 2012
Company Description Investment Case
National Grid has been underperforming since Ofgem Initial
Proposals last July for the 2013/14 – 2020/21 reviews for the RIIO
Electricity Transmission, Gas Transmission and Gas Distribution. The
proposals were tougher than expected.
The company published its detailed response to Ofgem Initial
Proposals. It highlights many areas where National Grid believes
there’s some score for an improvement. The Final Proposals should
Market Price Data be announced next December. Probably, the company will not get
National Grid (NG/ LN) respite in all the points raised, but it could be enough to further
Last Price (GBP) 693.50 derisk its balance sheet and dividend policy.
YTD Change 10.96%
Mkt Cap (GBP bn) 25.230 Main risks are a tougher than expected regulatory review on RIIO and
SSE (SSE LN) on settlements from its renegotiation of US rate plans.
Last Price (GBP) 1425.00
SSE is a well-managed company. SSE is the first of the suppliers to
YTD Change 10.38%
announce a tariff increase for this year, which could point to a
Mkt Cap (GPB bn) 13.651
weaker financial position (last month it was put on negative outlook
Source: Bloomberg
by S&P) and stronger competitors. Over the next months, the
company will need its major wind farm construction projects to
Analysts Recommendations: commission on time (renewable energy subsidies could be cut),
energy prices to show a positive evolution and emission costs to
remain low.
The National Grid / SSE currently trades at a ratio of 0.4867. We’ll
define as our targets 0.4996 and 0.5100. 0.4773 will be our stop-loss.
Source: Bloomberg
Technical Comment
Market Multiples
P/E EPS DY Net
2014 2011/14 2014 Debt/
CAGR EBITDA
Est. Est. Est. Est. 13
National Grid 12.68 -2.21% 5.97% 4.14
SSE 11.81 3.76% 6.16% 3.17
Source: Bloomberg
Next Report Date
National Grid Q3 Results November 15th
SSE Q3 Results November 14th
Source: Bloomberg
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