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02 Aug 2019
Investec - Centrica (Hold): Execution risk in tough markets
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Investec - Centrica (Hold): Execution risk in tough markets
Centrica plc (CNA:LON) | 128 0.9 0.5% | Mkt Cap: 6,826m
- Published:
02 Aug 2019 -
Author:
Martin Young -
Pages:
14
Clarity of UK strategy, but execution risk – A strong multi-channel offering in UK retail and ambitious cost reduction targets should give Centrica a fighting chance of arresting declining account numbers, but we would like to see tangible evidence of delivery before we become more bullish on margins.
We continue to struggle with merits of the geographic mix – North America Business struggled again in 1H19, but management is determined to turn the business around. We continue to struggle to see the attractions of a UK/North American mix, and would not rule out further strategic change once a new CEO arrives.
Earnings cut, disposals likely to dilute – Updated estimates post 1H19 results see adjusted EPS cut by 12% in FY19E, 15% in FY20E, and 6% in FY21E. Planned disposals of E&P and nuclear are likely to be dilutive to the tune of 9% based on our pro forma numbers for FY21E.
Target price cut to 75p, upgrade to Hold – Our SOTP is broadly unchanged, but we suggest that a discount is warranted given the lingering strategic and execution risks. At current levels, Centrica is trading on a dividend yield of 6.6% in FY20E, a level that does not strike us as unreasonable relative to UK peers. We cut our target price to 75p, but with this suggesting a 12-month total return of 5%, we upgrade to Hold.