Credit Suisse ups target for Centrica, says dividend more sustainable

Analysts at Credit Suisse marked up their target price for shares of Centrica on Monday, from 175p to 185p, telling clients that the dividend was now more sustainable and that the scrip might end in 2019 which would be "a major source of upside".

Buttressing their call regarding the payout, in Sterling terms, power, gas and oil prices were back at levels last seen in mid-2014.

Significantly, the draft price caps appeared manageable, they also said.

They estimated the price cap for standard variable customers would be set at around the level of the prepayment cap, which then stood at £1,081 per year.

"This appears to be consensus and would be a positive, in that it would allow Centrica to still earn a c5% EBIT margin (vs. 8.1% in 2017A) potentially with less competition; and (3) We do not think the dividend will be cut," the Swiss broker said.

Credit Suisse also estimated Centrica's operating cash flow would grow at a compound annual growth rate about 8% between 2018-20, helping ensure the dividend will be covered by cash.

"We expect the consultation on draft price caps by the end of August. We see the need for further price rises given where wholesale prices are, meaning we cannot rule out further political interference in 2020," it added.

The broker also revised up its estimate for the company's earnings per share in 2020 by about 5% to 16.9p and that for 2021 by roughly 6%, with the former now lying about 24% above consensus.

It also believed the disposal of the upstream unit was possible, which at a valuation of £2.5bn would allow about 20p per share to be returned to shareholders, even as the company deleveraged and paid down its pension deficit.

Credit Suisse stood by its 'outperform' recommendation.