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Centrica shares 'underappreciated', Jefferies upgrades
While Centrica shares had been in value territory for the last six months, analysts at Jefferies now see potential for "material earnings upgrades" from the British Gas owner as a result of the recent rally in energy prices and a regulatory shift.
The broker had remained on the sidelines over the shares in recent months due to subdued earnings momentum, but on Tuesday it highlighted the recent rally in power, gas and oil prices and the revelations from Ofgem's recent consultation which suggested that there is "unlikely" to be a highly punitive standard variable tariff price cap outcome, given that the primary focus of the cap is the protection of SVT customers.
Even with a £1,110 SVT price cap for direct debit customers, Jefferies still expects Centrica to continue to generate more than £2.1bn of adjusted operating cash flow per year.
Analysts also noted that Centrica's ability to strengthen its balance sheet and crystallise value with disposals "remains underappreciated".
The analysts think both the sale of Centrica's 20% stake in EDF Energy and divestment of Spirit Energy at valuations of £1bn and £1.9bn respectively would strengthen Centrica's balance sheet and crystallise value for shareholders.
All in all, the analysts raised their target price on Centrica from 140p to 165p and upgraded the firm from 'hold' to 'buy'.