today12 Jun 2018 13:39
12 Jun at 12:37
Jefferies upgrades Centrica to ‘buy’ as it claims Ofgem’s price cap won’t be “highly punitive”
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09:07 12 Jun 2018
Analyst Ahmed Farman reckons Ofgem is likely to adopt a “balanced approach” when it brings in its new price cap on standard variable tariffs
british gas bill
Farman estimates that SVT prices will be capped at £1,110 a year
Centrica PLC (LON:CNA) was the top riser on the FTSE 100 early Tuesday after the British Gas owner was upgraded to ‘buy’ by Jefferies.
One of the major talking points around energy stocks at the moment is the upcoming changes to how much British Gas, e-On et al will be able to charge customers on a standard variable tariff.
Investors had feared how hard regulator Ofgem would hit energy suppliers, but Jefferies’ Ahmed Farman doesn’t think the cap will be “highly punitive”.
£1,110 a year
“Although the primary focus of the cap is the protection of SVT customers, (Ofgem’s recent consultation paper) also references detailed consideration of financeability needs and costs of energy suppliers,” the analyst wrote in a note.
“This suggests a more balanced approach, with low likelihood of a highly punitive outcome.”
Farman estimates that Ofgem will impose a price cap of £1,110 a year – a saving of roughly £75 for direct debit customers – but he expects the impact of this to be “manageable”.
Away from the impact of the price cap, the analyst also points to the rise in commodity prices over the past few months as another reason for his upgrade.
“With the improvement in commodity prices since February, we increase our UK power, NBP gas and oil prices by c.10% and upgrade our 2018-20 earnings per share forecasts by 10% (+8% to 2019-20 consensus),” Farman adds.
'Balance sheet optionality'
In a final point, he claims the sale of a 20% stake in EDF Energy and the divestment of Spirit Energy – combined £2.9bn – “would strengthen Centrica's balance sheet and crystallise value for shareholders”.
Alongside his ‘buy’ recommendation (from ‘hold’), Farman also increased his price target to 165p (from 140p).
Centrica shares were up almost 2% early on Tuesday to 147.3p.
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