Centrica drops as UBS says energy tariff cap more likely

British Gas owner Centrica was under the cosh on Monday amid reports that the Conservative manifesto will include a cap on household energy bills, with UBS saying the snap election in June makes an energy tariff cap more likely.

The bank downgraded its stance on Centrica to 'neutral' from 'buy' and cut the price target to 215p from 255p.

"We now see implementation of some form of tariff cap as more likely than not," the bank said. It added that proposals could come this week or during the election campaign, but in either case the context of a general election increases the focus on visible action and the chance a tariff cap will be the preferred measure.

"This would be a negative development for Centrica which relies on UK retail for approx 1/3 of operating profit," it said.

UBS said a cap on the standard tariff could potentially reduce retail margins by a third.

"For now, sizing the impact requires estimation. But we note that supply margins have averaged 6-7% in recent years, mostly derived from standard tariff customers, whereas the CMA benchmark of a 1.25% EBIT margin + £15 'headroom' per fuel (used to calculate the existing prepay tariff cap) might suggest a target margin under a capped price of around 4-5%.

"If the same level were targeted on standard tariffs, it could result in a reduction of £150-200m per annum or approximately 1/3 of Centrica's UK supply margins."

To be conservative, UBS has factored in a 1/3 reduction in standard tariff margins from 2018.

However, the bank also said that if policy changes are benign, the shares could recover to 245p.

At 1208 BST, the shares were down 4.7% to 197.80p.