Monday share tips: Should you avoid Centrica?

on Dec 14, 2015
Updated: Feb 27, 2024

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Centrica Plc’s (LON:CNA) shares have dropped over 25 percent this year, as commodity prices slid amid softening demand from China and a supply glut exacerbated by a deflationary environment.

However, with the outlook for commodities prices deteriorating further, and given stiff political pressure to lower households’ gas bills, “the worst may not yet be over”, The Telegraph’s Questor said in an article over the weekend.
Although management has underscored its confidence in the company’s ability to generate £2 billion in operating cash flow this year – more than enough to cover dividend payments – Centrica’s shares “still don’t offer good value because there is uncertainty around the need for further asset writedowns and political pressure on home energy bills remains,” Questor noted.
The adviser added that a potential interest rate rise in the UK, which analysts have suggested is likely to happen next year, would also increase Centrica’s debt costs.
Questor advised investors to avoid the stock.
Similarly, Peter Stephens of The Motley Fool UK said today that buying shares in Centrica “may not appear to be the most exciting move at the moment”.
Stephens, however, also pointed out that the British Gas owner is at the start of a major transformation, which is set to realign the company as a pureplay domestic energy supplier.
“This will reduce the volatility of Centrica’s future revenue and profitability as a result of not being so reliant on the price of oil and gas, and will also deliver considerable cost savings,” Stephens wrote. “With Centrica currently trading on a price-to-earnings (P/E) ratio of 12, there’s considerable upward rerating potential on offer over the medium term too.”
Last week, the firm said it had seen an improvement in underlying performance since its half-year results earlier this year, noting that it had made “good operational and strategic progress […] against a challenging backdrop”.
The British Gas owner, however, also warned that UK residential energy supply margins in the second half were likely to be “materially lower” than the first half following the unit’s second five-percent reduction in residential gas tariffs.
Eleven out of 22 analysts polled by the Financial Times suggest that Centrica will outperform the market, while only three expect it to underperform. The consensus price target on the stock is 260p, which compares with a current market price of about 210p.

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