JPMorgan goes 'neutral' on Centrica ahead of new UK pricing regulations

15 April 2019

(Sharecast News) - Analysts at JPMorgan downgraded British energy and services firm Centrica to 'neutral' on Monday, noting that price regulation in the UK now looked certain to adversely impact competition, leading to compressed market pricing and lower churn.
JPMorgan feels that while earnings would be hit by the cap, lower earnings volatility and stable customer numbers were expected to provide Centrica with some relief to the cost of its capital and multiple expansion in the operating periods ahead.

The analysts stated that although early data points had been "supportive", they remained mindful that a temporary surge in commodity prices during the third quarter had created, yet another, perfect storm for Centrica, which will likely increase churn.

"Add mild Q1 weather, nuclear outages and softening upstream revenue to the mix and we now see 2019 and 2020 EPS below consensus. Combined with an impending dividend cut, this is unfortunately too much for us to endure," said JPMorgan, which also lowered its target price on Centrica from 150p to 125p per share.

"The writing has been on the wall for the dividend since the 2018 results in February, but outside an abrupt change of fortunes we see earnings and cash flow expectations retreating in the lead-up to the interim result in July."