HSBC retains 'hold' rating but raises target price at Centrica

Centrica’s shares fell on Thursday as HSBC warned the owner of British Gas could face a credit rating downgrade.

HSBC retained its ‘hold’ rating on the stock, citing a risk of a credit downgrade by Moody’s from Baa1 to Baa2.

However, the bank raised Centrica’s target price to 250p from 200p as it believes the energy group will benefit from cost cutting measures and an improvement in commodity prices.

“The recent trading statement confirmed that first quarter performance was in line with guidance and that cost cutting was on track but that British Gas Residential (BGR) had lost 1.5% of its residential customers,” the lender said.

“The next potential catalyst is the credit rating decision by Moody’s (Centrica is rated Baa1 but is on review for downgrade). Its metrics look challenged for 2016, but cost cutting and commodity price improvements could improve metrics in 2017.”

As part of its £750m cost-cutting programme, announced in July last year, Centrica has slashed 2,000 jobs and expects to achieve a reduction of around 3,000 roles by the end of the year. The company expects to achieve £200m in savings in 2016 and £500m by 2018.

“We believe Centrica has scope to deliver further cost savings to offset competitive pressure,” HSBC said.

“We increase our 2016 earnings per share (EPS) estimate by 2.4% and 2017 EPS estimate by 14%. We assume an 8% cut in upstream costs in 2017 and that Centrica can maintain margins in British Gas Residential at 7%.These savings in our view increase our confidence that a 12p dividend is sustainable.”

The broker note came as Centrica announced plans to raise around £750m in a placing to fund acquisitions and cut debt.

The company said it plans to issue around 350 million shares or 7% of its current issued share capital.

The company said the placing will enable it to secure two “prioritised and attractive” acquisitions to accelerate growth and develop capabilities in its customer-facing activities and reduce pressure on its credit metrics and its current strong investment grade credit ratings.

Shares fell 9.09% to 210.10p at 1002 BST.