Jefferies says Centrica dividend hanging 'by a thread', cuts target price
Analysts at Jefferies marked down their medium-term estimates for Centrica's earnings on the back of now lower projections for commodity prices and in anticipation of higher competitive pressures across the company's consumer and business units, leaving the dividend payout 'hanging by a thread'.
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Nonetheless, while the energy supplier's credit metrics and dividend were seen as "borderline", new costs cuts and asset disposals meant a dividend cut was not "inevitable", Ahmed Farman, Charlote Chiew and Luca Cartechini wrote in a research report sent to clients.
The analysts also said they saw "limited progress" ahead at Centrica's growth divisions, Connected Home and DE&P.
As a result of all of the above, they cut their estimates for the company's EPS and earnings before interest and taxes for 2019-2021 by about 10%.
Balance sheet-wise, debt was not the problem, they said, forecasting that asset sales would push net debt down to the middle of management's range for £2.7-3.7bn.
But adjusted operating cash flow was seen at the low end of the firm's guidance for £2.1-2.3bn.
Combined, Centrica's retained cash flow to net debt was seen at 29% over 2019-2020, versus the 25% minimum required for a BBB+ rating on its long-term debt.
"With this, our view remains unchanged that Centrica's dividend is hanging by a thread, but new costs and disposals mean that the balance sheet pressure is not acute enough to make a dividend cut inevitable, in our view. However, we also think that a re-affirmation of the 12p dividend, without further balance sheet and growth measures, is unlikely to get much credit from the market."
Hence, "questions around Centrica's capability to maintain its 12p DPS remains at the forefront of the debate," they said.
Farman and his colleagues cut their SOTP-based target price for Centrica's shares by 12% to 110p, but reaffirmed their 'hold' recommendation on the stock.