Goldman Sachs ups Centrica to 'buy', says underperformance overdone
British Gas owner Centrica got a boost on Tuesday as Goldman Sachs upped the stock to 'buy' from 'sell' and lifted the price target to 176p from 174p saying the underperformance is overdone given the commodity outlook and the fact that the worst of UK regulatory risk is behind us.
Centrica
128.55p
16:49 03/05/24
FTSE 100
8,213.49
16:59 03/05/24
FTSE 350
4,515.50
16:54 03/05/24
FTSE All-Share
4,469.09
17:14 03/05/24
Gas, Water & Multiutilities
6,101.32
16:54 03/05/24
GS noted that the shares have fallen around 40% over the last two years, weighed down by rising competition and increased political regulatory scrutiny within UK energy supply.
"What we believe is being overlooked is the impact of higher commodity prices. Year to date, gas and power prices have rallied 40% and 35%, respectively," the bank said. "Even taking a further £50m reduction in UK energy supply, we believe that the higher commodity prices add 26% earnings per share growth out to FY2020. This allows for the company to deliver a free cash flow yield (post total capex, pre dividends) of greater than 10% and cover its 8.4% 2021E dividend yield (27% premium to peers).
"With the stock trading at 9x 2021E price-to-earnings (a 20% discount to peers), we believe that Centrica offers good value at these levels."
Goldman said its EPS estimates are 14% and 23% ahead of Reuters consensus for FY2019 and FY2020.
The bank also noted Ofgem's recent price caps, which were in line with consensus. "We believe this event reduced sizeable downside risk and is before any potential moderation that could occur in the coming months."
At 1120 BST, the shares were up 2.2% to 148.60p.