JP Morgan upgrades Centrica to 'overweight'

JP Morgan said Centrica shares were in "deep value territory" as the bank upgraded its rating on the energy company to 'overweight'.

The British Gas owner has failed over several years to adapt to increased competition and regulatory scrutiny in its consumer business and has been hit by volatile oil and gas prices, JP Morgan analysts said. New management is starting to turn things round by simplifying the business and cutting costs, they said.

Competition will remain tough but Centrica is the UK's biggest household energy provider and has yet to take advantage of its scale, JP Morgan said. Restructuring will help push up profit margins for at British Gas to at least 3% in 2022 from 2% in 2020, the analysts estimated.

Analyst Javier Garrido upgraded Centrica's shares to 'overweight' from 'neutral' and cut his price target to 60p from 75p. He said his bear case scenario suggested the shares could fall 25% but that the base case scenario was for a 50% increase with the shares doubling in a bullish scenario.

"Centrica shares are trading in deep value territory," Garrido wrote in a note to clients. "Business simplification and material restructuring … should bring stability, if not growth, to the core. The risk/reward is clearly skewed to the upside and therefore we upgrade to OW [overweight],"

Garrido said he expected full-year results for 2020 to be the main catalyst for the shares. Sales of exploration and production and nuclear businesses should remove volatility and help drive a rerating too, he said.