Berenberg hikes target price on Centrica

Analyst at Berenberg hiked their target price on electric services company Centrica from 50.0p to 110.0p on Friday, stating the group's strong free cash flow yield had revived its dividend.

Berenberg said Centrica has benefited from an unprecedented period in energy markets, even with government interventions, as the same time as it worked to refocus the business away from upstream activities towards more efficient, sustainable energy activities.

"Centrica's FY22 performance shows that this strategy has begun to pay off: the company has fortified and de-risked its balance sheet through key disposals, although its results were boosted by the (unplanned) decision to retain its UK Spirit Energy and nuclear businesses," said the analysts.

However, Berenberg noted that it also expects to see commodity prices eventually normalise at lower levels, leading to a decline in earnings, and said the market's focus will then turn to the group's long-term strategy.

"We expect a strategic update to be presented in the summer, illustrating how Centrica can extract greater value from the business and effectively deploy its capital to grow," said the German bank, which reiterated its 'hold' rating on the stock.

"We value the shares at 110p using a blend of metrics: a DCF-EVA sum-0f-the-parts, a dividend discount model, a target yield and a target P/E. Centrica's 2023-26 EPS growth is -18%, reflecting the normalisation of power markets and loss of Spirit Energy earnings."

Reporting by Iain Gilbert at Sharecast.com